Table of Contents


Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
ýFORM10-Q

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 2017October 2, 2020
or
¨☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-30235
exel-20201002_g1.jpg
EXELIXIS, INC.
(Exact name of registrant as specified in its charter)

Delaware04-3257395
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification Number)
210 East Grand Ave.
South San Francisco,1851 Harbor Bay Parkway
Alameda, CA 9408094502
(650) 837-7000
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock $.001 Par Value per ShareEXELThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days).    Yes  ý No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerý☒Accelerated filer¨☐
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
☐		Smaller reporting company¨☐
Emerging growth company¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the Securities Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨ ☐No ý
As of October 24, 2017,26, 2020, there were 295,853,210310,243,961 shares of the registrant’s common stock outstanding.


Table of Contents

EXELIXIS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1.
3
Condensed Consolidated Balance Sheets – September 30, 2017 and December 31, 2016
3
Condensed Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2017 and 2016Income (Loss)
4
Condensed Consolidated Statements of Comprehensive Income (Loss) – Three and Nine Months Ended September 30, 2017 and 2016
4
Condensed Consolidated Statements of Stockholders’ Equity
5
Condensed Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017 and 2016
57
Notes to Condensed Consolidated Financial Statements
68
Item 2.
2322
Item 3.
3236
Item 4.
3336
PART II - OTHER INFORMATION
Item 1.
3437
Item 1A.
3437
Item 2.
5359
Item 3.
5359
Item 4.
5359
Item 5.
5359
Item 6.
5359
SIGNATURES

2
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
EXELIXIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)amounts)
(unaudited)
 September 30,
2017		 December 31, 2016*
ASSETS   
Current assets:   
Cash and cash equivalents$149,357
 $151,686
Short-term investments217,741
 268,117
Trade and other receivables90,005
 40,444
Inventory, net5,806
 3,338
Prepaid expenses and other current assets8,012
 5,416
Total current assets470,921
 469,001
Long-term investments50,569
 55,601
Long-term restricted cash and investments4,650
 4,150
Property and equipment, net19,256
 2,071
Goodwill63,684
 63,684
Other long-term assets692
 1,232
Total assets$609,772
 $595,739
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current liabilities:   
Accounts payable$5,988
 $6,565
Accrued compensation and benefits19,914
 20,334
Accrued clinical trial liabilities16,181
 14,131
Accrued collaboration liabilities9,137
 2,046
Current portion of deferred revenue31,377
 19,665
Convertible notes—
 109,122
Term loan payable—
 80,000
Other current liabilities26,356
 16,923
Total current liabilities108,953
 268,786
Long-term portion of deferred revenue246,092
 237,094
Other long-term liabilities16,012
 541
Total liabilities371,057
 506,421
Commitments
 
Stockholders’ equity   
Preferred stock, $0.001 par value, 10,000,000 shares authorized and no shares issued—
 —
Common stock, $0.001 par value; 400,000,000 shares authorized; issued and outstanding: 295,700,576 and 289,923,798 at September 30, 2017 and December 31, 2016, respectively296
 290
Additional paid-in capital2,106,132
 2,072,591
Accumulated other comprehensive loss(52) (416)
Accumulated deficit(1,867,661) (1,983,147)
Total stockholders’ equity238,715
 89,318
Total liabilities and stockholders’ equity$609,772
 $595,739
*The condensed consolidated balance sheet as of December 31, 2016 has been derived from the audited financial statements as of that date.
The accompanying notes are an integral part of these condensed consolidated financial statements.

EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Revenues:       
Net product revenues$96,416
 $42,742
 $253,297
 $83,459
Collaboration revenues56,094
 19,452
 79,108
 30,414
Total revenues152,510
 62,194
 332,405
 113,873
Operating expenses:       
Cost of goods sold4,658
 2,455
 10,875
 4,700
Research and development28,543
 20,256
 79,967
 72,166
Selling, general and administrative38,129
 32,463
 113,116
 103,143
Restructuring (recovery) charge—
 (244) (32) 871
Total operating expenses71,330
 54,930
 203,926
 180,880
Income (loss) from operations81,180
 7,264
 128,479
 (67,007)
Other income (expense), net:       
Interest income and other, net3,408
 3,059
 6,098
 4,010
Interest expense—
 (7,834) (8,679) (28,575)
Loss on extinguishment of debt—
 (13,773) (6,239) (13,773)
Total other income (expense), net3,408
 (18,548) (8,820) (38,338)
Income (loss) before income taxes84,588
 (11,284) 119,659
 (105,345)
Income tax expense3,206
 —
 3,921
 —
Net income (loss)$81,382
 $(11,284) $115,738
 $(105,345)
Net income (loss) per share, basic$0.28
 $(0.04) $0.39
 $(0.44)
Net income (loss) per share, diluted$0.26
 $(0.04) $0.37
 $(0.44)
Shares used in computing net income (loss) per share, basic294,269
 256,319
 292,776
 238,024
Shares used in computing net income (loss) per share, diluted312,940
 256,319
 311,555
 238,024
 September 30, 2020December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents$334,046 $266,501 
Short-term investments853,835 585,742 
Trade receivables, net166,138 119,073 
Inventory19,319 12,886 
Prepaid expenses and other current assets34,470 26,988 
Total current assets1,407,808 1,011,190 
Long-term investments358,079 536,385 
Property and equipment, net56,385 48,892 
Deferred tax assets, net155,678 172,374 
Goodwill63,684 63,684 
Other long-term assets69,409 53,145 
Total assets$2,111,043 $1,885,670 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable$47,927 $11,581 
Accrued compensation and benefits40,782 37,364 
Accrued clinical trial liabilities47,074 38,777 
Rebates and fees due to customers19,129 18,719 
Accrued collaboration liabilities11,102 11,856 
Other current liabilities35,329 24,449 
Total current liabilities201,343 142,746 
Long-term portion of deferred revenues9,322 6,596 
Long-term portion of operating lease liabilities47,626 48,011 
Other long-term liabilities721 2,347 
Total liabilities259,012 199,700 
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000 shares authorized and 0 shares issued0 0 
Common stock, $0.001 par value; 400,000 shares authorized; issued and outstanding: 309,402 and 304,831 at September 30, 2020 and December 31, 2019, respectively309 305 
Additional paid-in capital2,321,441 2,241,947 
Accumulated other comprehensive income6,239 3,069 
Accumulated deficit(475,958)(559,351)
Total stockholders’ equity1,852,031 1,685,970 
Total liabilities and stockholders’ equity$2,111,043 $1,885,670 
The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.
3
Table of Contents
EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(in thousands, except per share amounts)
(unaudited)
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Revenues:
Net product revenues$168,587 $191,768 $541,197 $565,024 
License revenues33,205 69,137 113,318 132,443 
Collaboration services revenues29,300 10,798 62,971 29,998 
Total revenues231,092 271,703 717,486 727,465 
Operating expenses:
Cost of goods sold8,725 7,537 27,235 22,577 
Research and development176,762 97,295 393,572 242,516 
Selling, general and administrative88,185 51,265 210,916 170,218 
Total operating expenses273,672 156,097 631,723 435,311 
Income (loss) from operations(42,580)115,606 85,763 292,154 
Interest income3,994 7,191 16,376 20,253 
Other income (expense), net565 (140)571 688 
Income (loss) before income taxes(38,021)122,657 102,710 313,095 
Provision for (benefit from) income taxes(5,981)25,205 19,317 60,826 
Net income (loss)$(32,040)$97,452 $83,393 $252,269 
Net income (loss) per share:
Basic$(0.10)$0.32 $0.27 $0.84 
Diluted$(0.10)$0.31 $0.26 $0.80 
Weighted-average common shares outstanding:
Basic309,116 303,268 307,437 301,999 
Diluted309,116 315,453 317,495 315,046 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Net income (loss)$(32,040)$97,452 $83,393 $252,269 
Other comprehensive income (loss):
Net unrealized gains (losses) on available-for-sale debt securities, net of tax impact of $453, $(129), $(893) and $(936), respectively(1,601)461 3,170 3,369 
Comprehensive income (loss)$(33,641)$97,913 $86,563 $255,638 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Net income (loss)$81,382
 $(11,284) $115,738
 $(105,345)
Other comprehensive income (loss) (1)
67
 (209) 364
 152
Comprehensive income (loss)$81,449
 $(11,493) $116,102
 $(105,193)
____________________
(1)Other comprehensive income (loss) consisted solely of unrealized gains or losses, net, on available-for-sale securities arising during the periods presented. There were nominal or no reclassification adjustments to net income (loss) resulting from realized gains or losses on the sale of securities and there was no income tax expense related to other comprehensive income during those periods.
The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.

4
Table of Contents
EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
Three Months Ended September 30, 2020
Common StockAdditional
Paid-in
Capital		Accumulated Other Comprehensive IncomeAccumulated
Deficit		Total
Stockholders’
Equity
SharesAmount
Balance at June 30, 2020308,886 $309 $2,269,093 $7,840 $(443,918)$1,833,324 
Net loss— — — — (32,040)(32,040)
Other comprehensive loss— — — (1,601)— (1,601)
Issuance of common stock under equity incentive and stock purchase plans516 — 1,872 — — 1,872 
Stock transactions associated with taxes withheld on equity awards— — (5,179)— — (5,179)
Stock-based compensation— — 55,655 — — 55,655 
Balance at September 30, 2020309,402 $309 $2,321,441 $6,239 $(475,958)$1,852,031 
Three Months Ended September 30, 2019
Common StockAdditional
Paid-in
Capital		Accumulated Other Comprehensive IncomeAccumulated
Deficit		Total
Stockholders’
Equity
SharesAmount
Balance at June 30, 2019302,785 $303 $2,211,668 $2,207 $(725,546)$1,488,632 
Net income— — — — 97,452 97,452 
Other comprehensive income— — — 461 — 461 
Issuance of common stock under equity incentive and stock purchase plans991 1 4,967 — — 4,968 
Stock transactions associated with taxes withheld on equity awards— — (935)— — (935)
Stock-based compensation— — 13,139 — — 13,139 
Balance at September 30, 2019303,776 $304 $2,228,839 $2,668 $(628,094)$1,603,717 
Continued on next page
5
Table of Contents
EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - continued
(in thousands)
(unaudited)
Nine Months Ended September 30, 2020
Common StockAdditional
Paid-in
Capital		Accumulated Other Comprehensive IncomeAccumulated
Deficit		Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 2019304,831 $305 $2,241,947 $3,069 $(559,351)$1,685,970 
Net income— — — — 83,393 83,393 
Other comprehensive income— — — 3,170 — 3,170 
Issuance of common stock under equity incentive and stock purchase plans4,571 4 19,823 — — 19,827 
Stock transactions associated with taxes withheld on equity awards— — (26,120)— — (26,120)
Stock-based compensation— — 85,791 — — 85,791 
Balance at September 30, 2020309,402 $309 $2,321,441 $6,239 $(475,958)$1,852,031 
Nine Months Ended September 30, 2019
Common StockAdditional
Paid-in
Capital		Accumulated Other Comprehensive Income (Loss)Accumulated
Deficit		Total
Stockholders’
Equity
SharesAmount
Balance at December 31, 2018299,876 $300 $2,168,217 $(701)$(880,363)$1,287,453 
Net income— — — — 252,269 252,269 
Other comprehensive income— — — 3,369 — 3,369 
Issuance of common stock under equity incentive and stock purchase plans3,900 4 23,244 — — 23,248 
Stock transactions associated with taxes withheld on equity awards— — (3,369)— — (3,369)
Stock-based compensation— — 40,747 — — 40,747 
Balance at September 30, 2019303,776 $304 $2,228,839 $2,668 $(628,094)$1,603,717 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
6
Table of Contents
EXELIXIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine Months Ended September 30,
 20202019
Net income$83,393 $252,269 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation6,731 6,088 
Stock-based compensation85,791 40,747 
Non-cash lease expense3,607 1,803 
Deferred taxes15,803 56,339 
Other, net1,609 (621)
Changes in operating assets and liabilities:
Trade receivables, net(47,074)(7,017)
Inventory(13,466)(3,528)
Prepaid expenses and other assets(15,868)(14,108)
Deferred revenue4,012 3,592 
Accounts payable and other liabilities51,151 33,371 
Net cash provided by operating activities175,689 368,935 
Cash flows from investing activities:
Purchases of property, equipment and other(16,055)(5,575)
Purchases of investments(866,975)(887,698)
Proceeds from maturities and sales of investments781,324 436,227 
Net cash used in investing activities(101,706)(457,046)
Cash flows from financing activities:
Proceeds from issuance of common stock under equity incentive and stock purchase plans19,682 18,956 
Taxes paid related to net share settlement of equity awards(26,120)(3,369)
Other, net0 (34)
Net cash (used in) provided by financing activities(6,438)15,553 
Net increase (decrease) in cash, cash equivalents and restricted cash67,545 (72,558)
Cash, cash equivalents and restricted cash at beginning of period268,137 315,875 
Cash, cash equivalents and restricted cash at end of period$335,682 $243,317 
Supplemental cash flow disclosures:
Right-of-use assets obtained in exchange for lease obligations$1,824 $12,944 
Unpaid liabilities incurred for purchases of property and equipment$843 $159 
Unpaid liabilities incurred to acquire investments$0 $8,961 
 Nine Months Ended September 30,
 2017 2016
Net income (loss)$115,738
 $(105,345)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:   
Depreciation and amortization842
 754
Stock-based compensation expense15,029
 18,346
Loss on extinguishment of debt6,239
 13,773
Amortization of debt discounts and debt issuance costs182
 8,295
Interest paid in kind(11,825) 5,939
Gain on other equity investments(2,980) (2,494)
Other1,530
 1,332
Changes in assets and liabilities:   
Trade and other receivables(49,241) (85,026)
Inventory, net(2,468) (676)
Prepaid expenses and other current assets(2,530) (3,342)
Other long-term assets689
 535
Accounts payable(577) (2,436)
Accrued compensation and benefits(420) 12,357
Accrued clinical trial liabilities2,050
 (3,184)
Accrued collaboration liabilities7,091
 7,772
Deferred revenue20,710
 251,512
Other current and long-term liabilities12,199
 7,183
Net cash provided by operating activities112,258
 125,295
Cash flows from investing activities:   
Purchases of property and equipment(3,449) (1,116)
Proceeds from sale of property and equipment14
 92
Purchases of investments(248,046) (258,509)
Proceeds from maturities of investments266,335
 100,635
Proceeds from sale of investments37,294
 2,266
Purchase of restricted cash and investments(11,150) (4,150)
Proceeds from maturities of restricted cash and investments10,650
 2,650
Proceeds from other equity investments2,980
 2,494
Net cash provided by (used in) investing activities54,628
 (155,638)
Cash flows from financing activities:   
Repayment of convertible notes and term loan payable(185,788) —
Payment on conversion of convertible notes
—
 (7,134)
Proceeds from exercise of stock options16,532
 9,296
Proceeds from employee stock purchase plan3,053
 479
Taxes paid related to net share settlement of equity awards(3,012) (2,713)
Net cash used in financing activities(169,215) (72)
Net decrease in cash and cash equivalents(2,329) (30,415)
Cash and cash equivalents at beginning of period151,686
 141,634
Cash and cash equivalents at end of period$149,357
 $111,219
Supplemental cash flow disclosure - non-cash investing and financing activity:   
Construction-in-progress deemed to have been acquired under build-to-suit lease

$14,530
 $—
Issuance of common stock in settlement of convertible notes$—
 $285,308

The accompanying notes are an integral part of these condensed consolidated financial statements.Condensed Consolidated Financial Statements.

7
Table of Contents
EXELIXIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Exelixis, Inc. (“Exelixis,” “we,” “our”(Exelixis, we, our or “us”)us) is aan oncology-focused biotechnology company committedthat strives to accelerate the discovery, development and commercialization of new medicines for difficult-to-treat cancers. Our drug discovery and development capabilities and commercialization platform are the foundations upon which we intend to improve carebring to market novel, effective and outcomes for peopletolerable therapies to provide cancer patients with cancer. additional treatment options.
Since our foundingwe were founded in 1994, three4 products discovered at Exelixisresulting from our discovery efforts have progressed through clinical development, received regulatory approval and enteredestablished a commercial presence in various geographies around the marketplace. Twoworld. NaN are derived from cabozantinib, our flagship molecule, an inhibitor of multiple tyrosine kinases including VEGF, MET, AXL, VEGF receptors and RET receptors:RET. Our cabozantinib products are: CABOMETYX® (cabozantinib) tablets approved for previously treated advanced renal cell carcinoma (“RCC”)(RCC) and previously treated hepatocellular carcinoma; and COMETRIQ® (cabozantinib) capsules approved for progressive, metastatic medullary thyroid cancer. For these types of cancer, cabozantinib has become or is becoming a standard of care. Beyond these approved indications, cabozantinib is currently the focus of a broad clinical development program and is being investigated both alone and in combination with other therapies in a wide variety of cancers.
The third product,other 2 products resulting from our discovery efforts are: COTELLIC® (cobimetinib) tablets, is a reversible, an inhibitor of MEK, approved as part of multiple combination regimens to treat specific forms of advanced melanoma and marketed under a collaboration with Genentech, Inc. (a member of the Roche Group) (Genentech); and MINNEBRO® (esaxerenone), an oral, non-steroidal, selective blocker of the mineralocorticoid receptor, approved for the treatment of hypertension in Japan and licensed to Daiichi Sankyo Company, Limited (Daiichi Sankyo).
We also remain committed to building our product pipeline by discovering and developing new therapies for cancer patients. Using our in-house drug discovery expertise, specifically in medicinal chemistry, tumor biology and pharmacology, we are advancing small molecule drug candidates toward and through preclinical development. In addition, we have augmented our internal drug discovery activities with multiple partnerships, including several that enable us to discover and advance various biologics, such as bispecific antibodies and antibody-drug conjugates (ADCs), and is approved as part of a combination regimenwe continue to treat advanced melanoma.engage in business development initiatives aimed at identifying and in-licensing promising, early-stage oncology assets, which we can further develop utilizing our established clinical development infrastructure.
Basis of ConsolidationPresentation
The condensed consolidated financial statementsaccompanying Condensed Consolidated Financial Statements include the accounts of Exelixis and those of our wholly-owned subsidiaries. These entities’ functional currency is the United States (“U.S.”) dollar. All intercompany balances and transactions have been eliminated.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and pursuant to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”)(SEC). Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the results of operations and cash flowsour financial statements for the periods presented have been included. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020 or for any future period. The accompanying Condensed Consolidated Financial Statements and Notes thereto should be read in conjunction with our Consolidated Financial Statements and Notes thereto for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed with the SEC on February 25, 2020.
We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 20172020, which is a 52-week fiscal year, will end on December 29, 2017January 1, 2021 and fiscal year 20162019, which was a 53-week fiscal year, ended on December 30, 2016.January 3, 2020. For convenience, references in this report as of and for the fiscal periods ended September 29, 2017October 2, 2020 and September 30, 2016,27, 2019, and as of and for the fiscal years ending January 1, 2021, and ended December 29, 2017 and December 30, 2016,January 3, 2020, are indicated as being as of and for the fiscal periods ended September 30, 20172020 and September 30, 2016,2019 and the years ending
8
Table of Contents
December 31, 2020 and ended December 31, 2017 and December 31, 2016,2019, respectively.
Operating results for Similarly, references in this report to the nine months ended September 30, 2017 are not necessarily indicativefirst day of the results that may be expected for thefiscal year ending December 31, 2017January 1, 2021 are indicated as being as of January 1, 2020.
Reclassifications
Certain prior period amounts in the accompanying Condensed Consolidated Financial Statements have been reclassified to conform to the current period presentation. Such reclassifications did not impact previously reported total revenues, income from operations, net income, total assets, total liabilities or total stockholders’ equity.
Segment Information
We operate in 1 business segment that focuses on the discovery, development and commercialization of new medicines for anydifficult-to-treat cancers. Our Chief Executive Officer, as the chief operating decision-maker, manages and allocates resources to our operations on a total consolidated basis. Consistent with this decision-making process, our Chief Executive Officer uses consolidated, single-segment financial information for purposes of evaluating performance, forecasting future period. Theseperiod financial statementsresults, allocating resources and notes should be readsetting incentive targets.
All of our long-lived assets are located in conjunction with the consolidated financial statementsU.S. See “Note 2. Revenues” for enterprise-wide disclosures about product sales, revenues from major customers and notes thereto for the year ended December 31, 2016, included in our Annual Report on Form 10-K filed with the SEC on February 27, 2017.revenues by geographic region.
Use of Estimates
The preparation of our condensed consolidated financial statementsthe accompanying Condensed Consolidated Financial Statements conforms to accounting principles generally accepted in the U.S., which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenueequity, revenues and expenses, and related disclosures. On an ongoing basis, management evaluates its estimates including, but not limited to, those related to revenue recognition, including deductions from revenues (such as rebates, chargebacks, sales returns and sales allowances), the period of performance, identification of deliverables and evaluation of milestones with respect to our collaborations, the amounts of revenues and expenses under our profit and loss sharing agreement, recoverability of inventory, certain accrued liabilities including accrued clinical trial liability, and stock-based compensation. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from those estimates.


Reclassifications
Certain prior period amountsIn March 2020, we received the Preliminary Calculation of our Branded Prescription Drug Fee for 2020, and in August 2020, the condensed consolidated financial statements have been reclassifiedFinal Calculation of our Branded Prescription Drug Fee for 2020 from the Internal Revenue Service for the 2018 sales year, which resulted in an increase in our estimate of such fees for the 2018 and 2019 sales years. Accordingly, we recorded an adjustment to conform to current period presentation. We reclassified $1.8increase selling, general and administrative expenses and our accrual for these fees by $5.1 million during the nine months ended September 30, 2020. This adjustment resulted in payable to our customers from Other current liabilities to Tradea $0.02 decrease in basic and other receivables in the accompanying December 31, 2016 Condensed Consolidated Balance Sheet. We have also reclassified the related balances between line items in Changes in assets and liabilities in the accompanying Condensed Consolidated Statement of Cash Flowsdiluted earnings per share for the nine months ended September 30, 2016 to conform the presentation of those line items to the corresponding presentation of assets and liabilities in our accompanying Condensed Consolidated Balance Sheets.2020.
Segment InformationRecently Adopted Accounting Pronouncements
We operate as a single reportable segment.
Stock-Based Compensation
InOn January 2017,1, 2020, we adopted Accounting Standards Update (“ASU”)(ASU) No. 2016-09, Compensation—Stock Compensation2018-18, Collaborative Arrangements (Topic 718)808): ImprovementsClarifying the Interaction between Topic 808 and Topic 606 (ASU 2018-18). ASU 2018-18 clarifies that certain transactions between collaborative arrangement participants should be accounted for as part of revenues under Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (Topic 606) when the counterparty is a customer for a distinct good or service (i.e. a unit of account). For units of account that are in the scope of Topic 606, all of the guidance in Topic 606 should be applied, including the guidance on recognition, measurement, presentation and disclosure. ASU 2018-18 precludes entities from presenting amounts related to Employee Share-Based Payment Accounting, (“transactions with a counterparty in a collaborative arrangement that is not a customer together with revenue from contracts with customers. If a portion of a distinct bundle of goods or services within an arrangement is not with a customer, then the unit of account is not within the scope of Topic 606, and the recognition and measurement of that unit of account shall be based on analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election. Upon adoption of ASU 2016-09”)2018-18, we have presented revenues from performance obligations associated with our collaboration arrangements that are within the scope of Topic 606 (license revenues) separately from revenues from performance obligations that are not subject to Topic 606 (collaboration services revenues). The adoption of ASU 2016-092018-18 was applied retrospectively, and prior periods have been restated to conform to the presentation prescribed by ASU 2018-18. The adoption of ASU 2018-18 did not impact total revenues for the prior period presented in the accompanying Condensed Consolidated Statements of Income.
On January 1, 2020, we adopted ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies goodwill impairment testing by eliminating the second
9
Table of Contents
step of the impairment test. The amended guidance requires an impairment charge to be recognized for the amount by which the carrying amount of a reporting unit exceeds its fair value under a one-step impairment test. The adoption of ASU 2017-04 did not impact the accompanying Condensed Consolidated Financial Statements.
On January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (ASU 2016-13). ASU 2016-13 implements an impairment model, known as the current expected credit loss model, that is aimedbased on expected losses rather than incurred losses. Under the new guidance, we will recognize our estimate of current expected credit losses as an allowance on financial assets measured at amortized cost, including accounts receivable, unbilled collaboration revenues, and investments classified as available for sale. Current expected credit losses were immaterial as of the date of adoption, and the adoption of ASU 2016-13 did not have a significant impact on the accompanying Condensed Consolidated Financial Statements.
Investment Impairment
Quarterly, we assess each of our investments in debt securities available-for-sale whose fair value is below its cost basis to determine if the investment’s impairment is due to credit-related factors or noncredit-related factors. Factors considered in determining whether an impairment is credit-related include the extent to which the investment’s fair value is less than its cost basis, declines in published credit ratings, issuer default on interest or principal payments, and declines in the financial condition and near-term prospects of the issuer. If we determine a credit-related impairment exists, we will measure the credit loss based on a discounted cash flows model. Credit-related impairments on debt securities available-for-sale are recognized as an allowance for credit losses with a corresponding adjustment to other income, net in the accompanying Condensed Consolidated Statements of Income. The portion of the impairment that is not credit-related is recorded, net of applicable taxes, as a reduction of other comprehensive income.
We have elected to exclude accrued interest from both the fair value and the amortized cost basis of debt securities available-for-sale for the purposes of identifying and measuring an impairment. We write-off accrued interest as a reduction of interest income when an issuer has defaulted on interest payments due on a security.
Accounts Receivable
Trade receivables, net contain amounts billed to our customers for product sales, and amounts billed to our collaboration partners for development, regulatory and sales-based milestone payments, royalties on the sale of licensed products, profit-sharing arrangements, development cost reimbursements, and payments for product supply services. Our customers are primarily pharmaceutical and biotechnology companies that are located in the U.S., and collaboration partners that are located in Europe and Japan. As of September 30, 2020 and December 31, 2019, 47% and 38%, respectively, of our trade receivables were from our collaboration partner Ipsen Pharma SAS (Ipsen), and 12% and 14% were from affiliates of McKesson Corporation. We record trade receivables net of allowances for credit losses and chargebacks, and cash discounts for prompt payment. We apply an aging method to estimate credit losses and consider our historical loss information, adjusted to account for current conditions, and reasonable and supportable forecasts of future economic conditions affecting our customers.
Goodwill
We recorded goodwill amounts as the excess purchase price over tangible assets, liabilities and intangible assets acquired based on their estimated fair value. We review the carrying amount of goodwill for impairment annually and whenever events or changes in circumstance indicate that the carrying value may not be recoverable. We perform our annual assessment of the recoverability of our goodwill as of the first day of our fourth quarter. The assessment of recoverability may first consider qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. We perform a quantitative assessment if the qualitative assessment results in a more likely than not determination or if a qualitative assessment is not performed. The quantitative assessment determines whether the carrying amount of a reporting unit exceeds its fair value, in which case an impairment charge is recognized for the amount by which the carrying amount of a reporting unit exceeds its fair value, limited to the goodwill balance. We operate in 1 business segment, which is also considered to be our sole reporting unit and therefore, goodwill is tested for impairment at the simplificationenterprise level. We did 0t recognize any impairment charges in any of several aspectsthe periods presented.
10
Table of Contents
Collaboration Agreements
We assess whether our collaboration agreements are subject to ASC Topic 808, Collaborative Arrangements (Topic 808) based on whether they involve joint operating activities and whether both parties have active participation in the arrangement and are exposed to significant risks and rewards. To the extent that the arrangement falls within the scope of Topic 808, we apply by analogy the unit of account guidance under Topic 606 to identify distinct performance obligations, and then determine whether a customer relationship exists for each distinct performance obligation. If we determine a performance obligation within the arrangement is with a customer, we apply the guidance in Topic 606. If a portion of a distinct bundle of goods or services within an arrangement is not with a customer, then the unit of account is not within the scope of Topic 606, and the recognition and measurement of that unit of account shall be based on analogy to authoritative accounting literature or, if there is no appropriate analogy, a reasonable, rational, and consistently applied accounting policy election.
We enter into collaboration arrangements, under which we license certain rights to our intellectual property to third parties. The terms of these arrangements typically include payments to us for one or more of the following: nonrefundable up-front license fees; development, regulatory and sales-based milestone payments; product supply services; development cost reimbursements; profit-sharing arrangements; and royalties on net sales of licensed products. As part of the accounting for employee share-based payment transactions, including accountingthese arrangements, we develop assumptions that require judgment to determine the standalone selling price for forfeitures, income tax consequenceseach performance obligation identified in the contract. These key assumptions may include forecasted revenues, clinical development timelines and classification oncosts, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.
Up-front License Fees: If the statement of cash flows.
Pursuantlicense to our intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, we recognize revenues from nonrefundable up-front fees allocated to the adoptionlicense when the license is transferred to the licensee and the licensee is able to use and benefit from the license, which generally occurs at or near the inception of ASU 2016-09,the contract. For licenses that are bundled with other promises, we have made an electionutilize judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time and, if over time, the appropriate method of measuring progress for purposes of recognizing revenues from nonrefundable up-front fees. We evaluate the measure of progress at the end of each reporting period and, if necessary, adjust the measure of performance and related revenue recognition.
Regulatory and Development Milestone Payments: At the inception of each arrangement that includes development milestone payments, we evaluate whether the milestones are considered probable of being reached and estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would not occur, the associated milestone value is included in the transaction price. Milestone payments that are not within our or the licensee’s control, such as regulatory approvals, are not considered probable of being achieved until uncertainty associated with the approvals has been resolved. The transaction price is then allocated to each performance obligation, on a relative standalone selling price basis, for which we recognize revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, we re-evaluate the probability of achieving such development and regulatory milestones and any related variable consideration constraint, and if necessary, adjust our estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis.
Product Supply Services: Arrangements that include a promise for the future supply of drug product for either clinical development or commercial supply at the licensee’s discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.
Development Cost Reimbursements: Our collaboration arrangements may include promises of future clinical development and drug safety services, as well as participation on certain joint committees. When such services are provided to a customer, and they are distinct from the licenses provided to our collaboration partners, these promises are accounted for as a separate performance obligation which we estimate using internal development costs incurred and projections through the term of the arrangements. We record forfeitures when they occur. Previously, stock-based compensation wasrevenues for these services as the performance obligations are satisfied over time based on the numbermeasure of awards expected to vest after considering estimated forfeitures. The change in accounting principle with regards to forfeitures was adopted usingprogress. However, if we conclude that our collaboration partner is not a modified retrospective approach, with a cumulative adjustment of $0.3 million to accumulated deficitcustomer for those collaborative research and additional paid-in-capital as of January 1, 2017. No prior periods were restated as a result of this change in accounting principle.
As a result of the adoption of ASU 2016-09, as of January 1, 2017development activities, we also recorded an increase to the federal and state net operating losses of $56.9 million for excess tax benefits previously not included. The resulting increase to the deferred tax assets of approximately $21.2 million was offset by a corresponding increase to the valuation allowance, resulting in a net zero impact to both our income tax expense in our Condensed Consolidated Statements of Operations and our deferred tax assets and liabilities in our Condensed Consolidated Balance Sheets.
ASU 2016-09 also requires that cash paid to taxing authorities when directly withholding shares for tax withholding purposes be classified as a financing activity on our Condensed Consolidated Statement of Cash Flows. Previously, we classifiedpresent such payments as operating cash flows. The changea reduction of research and development expenses.
Profit-sharing Arrangements: Under the terms of our collaboration agreement with Genentech for cobimetinib, we are entitled to a share of U.S. profits and losses received in accounting principleconnection with regards to such cash flows was adopted using a retrospective approach. Accordingly,the commercialization of cobimetinib. We
11
Table of Contents
account for this arrangement in accordance with Topic 606. We have determined that we are an agent under the agreement and therefore revenues are recorded a reclassification that resulted in an increase in cash provided by operating activities by $2.7 million along with a corresponding increase in cash used in financing activities in our Condensed Consolidated Statementnet of Cash Flowscosts incurred. We record revenues for the nine months ended September 30, 2016.variable consideration associated with the profits and losses under the collaboration agreement when it is probable that a significant reversal in the amount of cumulative revenues recognized will not occur.
Royalty and Sales-based Milestone Payments: For arrangements that include royalties and sales-based milestone payments, including milestone payments earned for the first commercial sale of a product, the license is deemed to be the predominant item to which such payments relate and we recognize revenues at the later of when the related sales occur or when the performance obligation to which the royalty has been allocated has been satisfied.
Recent Accounting Pronouncements Not Yet Adopted
In May 2014,December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers2019-12, Income Taxes (Topic 606) (“740)-Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2014-09”). In August 2015,2019-12 simplifies the FASB issuedaccounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes and clarifying and amending existing guidance. ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended, becomes2019-12 will be effective for us in the first quarter of fiscal year 2018,2021 with early adoption permitted. We are currently assessing the impact of ASU 2019-12 on our financial statements.
NOTE 2. REVENUES
Revenues consisted of the following (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Product revenues:
Gross product revenues$220,401 $239,916 $702,865 $704,084 
Discounts and allowances(51,814)(48,148)(161,668)(139,060)
Net product revenues168,587 191,768 541,197 565,024 
Collaboration revenues:
License revenues33,205 69,137 113,318 132,443 
Collaboration services revenues29,300 10,798 62,971 29,998 
Total collaboration revenues62,505 79,935 176,289 162,441 
Total revenues$231,092 $271,703 $717,486 $727,465 
Net product revenues and license revenues are recorded in accordance with Topic 606. License revenues include the recognition of the portion of milestones payments allocated to the transfer of intellectual property licenses for which is whenit had become probable in the current period that the milestone would be achieved and a significant reversal of revenues would not occur, as well as royalty revenues and our share of profits under our collaboration agreement with Genentech. Collaboration services revenues were recorded in accordance with Topic 808 and by analogy to Topic 606. Collaboration services revenues include the recognition of deferred revenues for the portion of upfront and milestone payments allocated to our research and development services performance obligations, development cost reimbursements earned under our collaboration agreements, product supply revenues, net of product supply costs, and the royalties we will adopt the standard. ASU 2014-09 also permits two methodspaid to GlaxoSmithKline (GSK) on sales of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effectproducts containing cabozantinib by our collaboration partners.
Net product revenues by product were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
CABOMETYX$159,555 $187,410 $522,381 $552,315 
COMETRIQ9,032 4,358 18,816 12,709 
Net product revenues$168,587 $191,768 $541,197 $565,024 
12
Table of initially applying the guidance recognized at the date of initial application (the modified retrospective method). We will adopt ASU 2014-09 using the modified retrospective method.Contents
The core principlepercentage of ASU 2014-09total revenues by customer who individually accounted for 10% or more of our total revenues were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Ipsen16 %28 %16 %17 %
Affiliates of CVS Health Corporation14 %13 %15 %15 %
Affiliates of McKesson Corporation12 %12 %13 %12 %
Affiliates of AmerisourceBergen Corporation11 %9 %11 %10 %
Affiliates of Optum Specialty Pharmacy10 %7 %11 %8 %
Takeda Pharmaceutical Company Limited (Takeda)10 %0 %7 %2 %
Revenues by geographic region were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
U.S.$171,552 $194,484 $549,379 $572,957 
Europe36,006 76,017 117,959 120,134 
Japan23,534 1,202 50,148 34,374 
Total revenues$231,092 $271,703 $717,486 $727,465 
Net product revenues are attributed to geographic region based on the ship-to location. License and collaboration services revenues are attributed to geographic region based on the location of our collaboration partners’ headquarters.
Product Sales Discounts and Allowances
The activities and ending reserve balances for each significant category of discounts and allowances, which constitute variable consideration, were as follows (in thousands):
Chargebacks and Discounts for Prompt PaymentOther Customer Credits/Fees and Co-pay AssistanceRebatesTotal
Balance at December 31, 2019$7,514 $3,497 $15,222 $26,233 
Provision related to sales made in:
Current period108,166 11,718 41,351 161,235 
Prior periods33 (352)752 433 
Payments and customer credits issued(107,118)(11,513)(41,546)(160,177)
Balance at September 30, 2020$8,595 $3,350 $15,779 $27,724 
The allowance for chargebacks and discounts for prompt payment is that an entity should recognize revenue when it transfers promised goods or servicesrecorded as a reduction of trade receivables, net and the remaining reserves are recorded as rebates and fees due to customers in an amount that reflects the accompanying Condensed Consolidated Balance Sheets.
Contract Assets and Liabilities
We receive payments from our collaboration partners based on billing schedules established in each contract. Amounts are recorded as accounts receivable when our right to consideration tois unconditional. We may also recognize revenues in advance of the contractual billing schedule and such amounts are recorded, net of any allowance for credit losses, as a contract asset when recognized. Contract assets, which are presented in prepaid expenses and other current assets in the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five step process to achieve this core principleaccompanying Condensed Consolidated Balance Sheets, were $0 and in doing so, has created the possibility that more judgment$1.1 million as of September 30, 2020 and estimatesDecember 31, 2019, respectively. We may be required within the revenue recognition process than required under existing U.S. generally accepted accounting pronouncements. We have substantially completed our analysis on the adoption of ASU 2014-09 and have determined the adoption will not have a material impact on theto defer recognition of revenuerevenues for upfront and milestone payments until we perform our obligations under these arrangements, and such amounts are recorded as deferred revenues upon receipt or when due. Contract liabilities were $10.6 million and $6.6 million as of September 30, 2020 and
13
Table of Contents
December 31, 2019, respectively. The current portion of the contract liabilities totaling $1.3 million and $0 as of September 30, 2020 and December 31, 2019, respectively, are presented in other current liabilities and the remainder of the contract liabilities are presented in long-term portion of deferred revenues as of those dates in the accompanying Condensed Consolidated Balance Sheets. For those contracts that have multiple performance obligations, contract assets and liabilities are reported on a net basis at the contract level.
Significant changes in contract assets during the nine months ended September 30, 2020 include the impact of a $20.0 million development milestone from product sales. ASU 2014-09 willIpsen we determined was probable of achievement, which was offset by the impact of a $10.0 million milestone from Takeda which was recognized as revenues during the timing of recognition of revenue for our collaboration arrangements with Ipsen Pharma SAS (“Ipsen”)year ended December 31, 2019 and Takeda Pharmaceutical Company Ltd. (“Takeda”). We expect to reclassify deferred revenue

to accumulated deficit (a concept known as “lost revenue”) for amounts associated with these collaboration arrangements upon recording our transition adjustmentwas achieved, invoiced and collected in the first quarter of 2018,2020.
During the nine months ended September 30, 2020 and 2019, we recognized $6.8 million and $2.7 million, respectively, in revenues that were included in the beginning deferred revenues balance for those periods.
During the three and nine months ended September 30, 2020, we recognized $33.1 million and $115.3 million, respectively, in revenues for performance obligations satisfied in previous periods as compared to $67.7 million and $129.0 million during the comparable periods in 2019. Such revenues primarily duerelated to milestone and royalty payments allocated to the timinglicense performance obligations for our collaborations with Ipsen, Takeda, Daiichi Sankyo and Genentech.
As of recognitionSeptember 30, 2020, $88.9 million of revenue relatedthe combined transaction prices for our Ipsen and Takeda collaborations were allocated to intellectual property licensesperformance obligations that we have transferredhad not yet been satisfied. See “Note 3. Collaboration Agreements - Cabozantinib Commercial Collaborations - Performance Obligations and Transaction Prices for developmentour Ipsen and commercialization ofTakeda Collaborations” to our products. Additionally, for all of our collaboration arrangements, the timing of recognition of certain of our development and regulatory milestones could change as a result of the variable consideration guidanceConsolidated Financial Statements included in ASU 2014-09. ASU 2014-09 will also require additional disclosures regarding our revenue transactions.Annual Report on Form 10-K for the year ended December 31, 2019 for information about the expected timing to satisfy these performance obligations.
NOTE 2:3. COLLABORATION AGREEMENTS
We have established multiple collaborations with leading pharmaceutical companies for the commercialization and further development of cabozantinib. Additionally, consistent with our business strategy prior to the commercialization of cabozantinib, we entered into other collaborations with leading pharmaceutical companies for other compounds and programs in our portfolio. Under these collaborations, we are generally entitled to receive milestone and royalty payments, and for certain collaborations receive payments for product supply services, development cost reimbursements, and/or profit-sharing payments. See “Note 2. Revenues” for additional information on revenues recognized under our collaboration agreements.
We have also established multiple collaborations with smaller, discovery-focused biotechnology companies to expand our product pipeline. Under these collaborations, we may be required to make milestone and royalty payments, and for certain collaborations make payments for development cost reimbursements and/or option exercise fees.
See “Note 3. Collaboration Agreements” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, or as further described below, for a description of each of our collaboration agreements.
Cabozantinib Collaborations
Ipsen Collaboration
In February 2016, we entered into a collaboration and license agreement (the “Ipsen Collaboration Agreement”) with Ipsen for the commercialization and further development of cabozantinib. Pursuant toUnder the terms of the Ipsen Collaboration Agreement,collaboration agreement, as amended, Ipsen received exclusive commercialization rights for current and potential future cabozantinib indications outside of the U.S., Canada and Japan (the “Ipsen Territory”). The Ipsen Collaboration Agreement was subsequently amended in December 2016 (the “Amendment”) to include commercialization rights in Canada in the Ipsen Territory.Japan. We have also agreed to collaborate with Ipsen on the development of cabozantinib for current and potential future indications.
In consideration The parties’ efforts are governed through a joint steering committee and appropriate subcommittees established to guide and oversee the collaboration’s operation and strategic direction; provided, however, that we retain final decision-making authority with respect to cabozantinib’s ongoing development. During the second quarter of 2020, Ipsen opted into and is now co-funding the development costs for the exclusive licenseCONTACT-01 and other rights contained in the Ipsen Collaboration Agreement, Ipsen paid us an upfront nonrefundable payment of $200.0 million in March 2016. Additionally, as a result of the Amendment, we received a $10.0 million upfront nonrefundable payment from Ipsen in December 2016 and, as a result of the approvalCONTACT-02, two phase 3 pivotal trials of cabozantinib in second-line RCC bycombination with atezolizumab in patients with previously treated, metastatic non-small cell lung cancer and metastatic castration-resistant prostate cancer, respectively, and the European Commission (“EC”) in September 2016, we receivedfour remaining cohorts of COSMIC-021 it had not previously opted into. COSMIC-021 is a $60.0 million milestone in November 2016. We are receiving a 2% royalty onbroad phase 1b study evaluating the initial $50.0 million of net sales by Ipsen,safety and are entitled to receive a 12% royalty on the next $100.0 million of net sales by Ipsen. After the initial $150.0 million of sales, we are entitled to receive a tiered royalty of 22% to 26% on annual net sales by Ipsen; these tiers will reset each calendar year. We are primarily responsible for funding cabozantinib-related development costs for those trials in existence at the time we entered into the Ipsen Collaboration Agreement; global development costs for additional trials are shared between the parties, with Ipsen reimbursing us for 35% of such costs, provided Ipsen opts in to participate in such additional trials. Pursuant to the terms of the Ipsen Collaboration Agreement, we will remain responsible for the manufacture and supplytolerability of cabozantinib for all development and commercialization activities. As partin combination with atezolizumab in patients with locally advanced or metastatic solid tumors.
14
Table of Contents
Revenues under the collaboration agreement we entered into a supply agreement pursuant to which we will supply finished, labeled drug product towith Ipsen for distribution in the Ipsen Territories at our cost, as defined in the agreement, which excludes the 3% royalty we are required to pay GlaxoSmithKline (“GSK”) on Ipsen’s Net Sales of any product incorporating cabozantinib.
The Ipsen Collaboration Agreement contains multiple deliverables consisting of intellectual property licenses, delivery of products and/or materials containing cabozantinib to Ipsen for all development and commercial activities, research and development services, and participation on the joint steering, development and commercialization committees (as defined in the Ipsen Collaboration Agreement). We determined that these deliverables do not have stand-alone value and accordingly, combined these deliverables into a single unit of accounting and allocated the entire arrangement consideration to that combined unit of accounting. As a result, the upfront payment of $200.0 million, received in the first quarter of 2016 and the $10.0 million upfront payment received in December 2016 in consideration for the development and commercialization rights in Canada are being recognized ratably over the term of the Ipsen Collaboration Agreement, through early 2030, which is the current estimated patent expiration of cabozantinib in the European Union. At the time we entered into the Ipsen Collaboration Agreement, we also determined that the $60.0 million milestone we achieved upon the approval of cabozantinib by the EC in second-line RCC was not substantive due to the relatively low degree of uncertainty and relatively low amount of effort required on our part to achieve the milestone as of the date of the collaboration agreement; the $60.0 million was deferred entirely until the date of the European Medicines Agency’s (the “EMA”) approval of cabozantinib in second-line RCC in September 2016 and has been and will continue to be recognized ratably over the remainder of the term of the Ipsen Collaboration Agreement. The two $10.0 million milestones for the first commercial sales of CABOMETYX in Germany and the United Kingdom were determined to be substantive at the time we entered into the Ipsen Collaboration Agreement and were recognized as collaboration revenues in the fourth quarter of 2016. We determined that the remaining development and regulatory milestones are substantive and will be recognized as revenue in the periods in which they are achieved. We consider the contingent payments due to us upon the achievement of specified sales volumes to be similar to royalty payments. Reimbursements for development costs are classified as revenue as the development services represent our ongoing major or central operations.

During the three months ended March 31, 2017, we reclassified $9.0 million of deferred revenue to Accrued collaboration liabilities and Other long-term liabilities, and accordingly adjusted our amortization of the upfront payment of $200.0 million as a result of a change in operational responsibilities for certain clinical programs in the Ipsen Territory. As of September 30, 2017, we had paid $2.1 million toward the $9.0 million of reimbursements due to Ipsen for these clinical programs.
In September 2017, we recognized two milestones totaling $45.0 million resulting from Ipsen’s receipt of the validation from the EMA for the application for variation to the CABOMETYX marketing authorization for the addition of a new indication in first-line treatment of advanced RCC in adults. The two milestones were determined to be substantive at the time we entered into the Ipsen Collaboration Agreement and were recognized as collaboration revenues in the third quarter of 2017. Payment for the first milestone of $20.0 million is due in the fourth quarter of 2017 and payment for the second milestone of $25.0 million is due in the first quarter of 2018.
See “Note 2 - Collaboration Agreements” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 27, 2017 for additional description of our collaboration agreement with Ipsen.
During the three and nine months ended September 30, 2017 and 2016, collaboration revenues under the Ipsen Collaboration Agreement were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
License revenues$19,910 $66,409 $71,456 $95,318 
Collaboration services revenues16,096 9,607 46,503 24,815 
Total$36,006 $76,016 $117,959 $120,133 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Milestones achieved$45,000
 $—
 $45,000
 $—
Amortization of upfront payments and deferred milestone4,742
 3,780
 13,788
 8,570
Royalty revenue371
 —
 814
 —
Development cost reimbursements1,123
 —
 2,322
 —
Product supply agreement revenue1,681
 —
 3,483
 —
Cost of supplied product(1,681) —
 (3,483) —
Royalty payable to GSK on net sales by Ipsen(557) —
 (1,221) —
Collaboration revenues under the Ipsen Collaboration Agreement$50,679
 $3,780
 $60,703
 $8,570
At September 30, 2020, we are eligible to receive additional regulatory and development milestone payments from Ipsen totaling an aggregate of $59.0 million, as well as sales-based milestones, including milestone payments earned for the first commercial sale of a product, of up to $469.9 million. We excluded these milestones from the transaction price as of September 30, 2020 because we determined such payments to be fully constrained under Topic 606 due to the fact that it was not probable that a significant reversal of cumulative revenue would not occur, given the inherent uncertainty of success with these milestones. We will re-evaluate the transaction price at each reporting period and as uncertain events are resolved or other changes in circumstances occur.
As of September 30, 2017, short-term and long-term deferred revenue relating to the Ipsen Collaboration Agreement was $19.02020, $42.6 million and $215.0 million, respectively.
Genentech Collaboration
In December 2006, we out-licensed the further development and commercialization of cobimetinib to Genentech pursuant to a worldwide collaboration agreement (the “Genentech Collaboration Agreement”). Under the terms of the Genentech Collaboration Agreement for cobimetinib, we are entitledtransaction price was allocated to a share of profitsour research and losses received in connection with cobimetinib’s commercialization in the U.S. This profit and loss sharedevelopment services performance obligation that has multiple tiers: we are entitled to 50% of profits and losses from the first $200.0 million of U.S. actual sales, decreasing to 30% of profits and losses from U.S. actual sales in excess of $400.0 million. Separately, we are entitled to low double-digit royalties on net sales outside the U.S. In November 2013, we exercised an option under the Genentech Collaboration Agreement to co-promote COTELLIC in the U.S., which allows for us to provide up to 25% of the total sales force for approved cobimetinib indications in the U.S. In 2015, we began fielding 25% of the sales force promoting COTELLIC in combination with Zelboraf® as a treatment for patients with BRAF mutation-positive advanced melanoma.
On June 3, 2016, we filed a Demand for Arbitration before JAMS in San Francisco, California asserting claims against Genentech related to its clinical development, pricing and commercialization of COTELLIC, and cost and revenue allocations arising from COTELLIC’s commercialization in the U.S. Our arbitration demand asserted that Genentech breached the Genentech Collaboration Agreement by, amongst other breaches, failing to meet its diligence and good faith obligations.
On July 13, 2016, Genentech asserted a counterclaim for breach of contract seeking monetary damages and interest related to the cost allocations under the Genentech Collaboration Agreement. On December 29, 2016, however, Genentech withdrew its counterclaim against us and stated that it would unilaterally change its approach to the allocation

of promotional expenses arising from commercialization of the COTELLIC plus Zelboraf combination therapy, both retrospectively and prospectively. The revised allocation approach substantially reduced our exposure to costs associated with promotion of the COTELLIC plus Zelboraf combination in the U.S. However, other significant issues remained in dispute between the parties. Genentech’s action did not address the claims in our demand for arbitration related to Genentech’s clinical development of cobimetinib, or pricing or promotional costs for COTELLIC in the U.S. and it did not fully resolve claims over revenue allocation. In addition, Genentech’s unilateral action did not clarify how it intended to allocate promotional costs incurred with respect to the promotion of other combination therapies that include COTELLIC for other indications that may be developed or are in development and may be approved. As a result, we continued to press our position before the arbitral panel to obtain a just resolution of these claims.
On June 8, 2017, the parties settled the arbitration, which was dismissed with prejudice. The settlement was memorialized in a settlement agreement dated July 19, 2017, that included a mutual release of all claims arising out of or related in any way to the causes of actions and/or claims that were asserted or could haveyet been asserted based on the facts alleged in the arbitration. The settlement does not provide for payments in settlement of the asserted claims; as part of the settlement, on July 19, 2017, the parties entered into an amendment to the Genentech Collaboration Agreement. Pursuant to the terms of the amendment, we continue to be entitled to a share of U.S. profits and losses received in connection with the commercialization of COTELLIC in accordance with the profit share tiers as originally set forth in the collaboration agreement, which share continues to decrease as sales of COTELLIC increase. However, effective as of July 1, 2017, the revenue for each sale of COTELLIC applied to the profit and loss statement for the collaboration agreement (the “Collaboration P&L”) is being calculated using the average of the quarterly net selling prices of COTELLIC and any additional branded Genentech product(s) prescribed with COTELLIC in such sale. While we also continue to share U.S. commercialization costs for COTELLIC, the amendment expressly sets forth that the amount of commercialization costs Genentech is entitled to allocate to the Collaboration P&L is to be reduced based on the number of Genentech products in any given combination including COTELLIC. In addition, the amendment also sets forth the parties’ confirmation and agreement that we have exercised our co-promotion option and that, as such, we have the option to co-promote current and future Genentech combinations that include COTELLIC in the U.S.
During the three and nine months ended September 30, 2017 and 2016, ex-U.S. royalty revenues and U.S. losses under the Genentech Collaboration Agreement were as follows (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Royalty revenues on ex-U.S. sales of COTELLIC included in Collaboration revenues$1,392
 $672
 $5,057
 $1,844
U.S. losses included in Selling, general and administrative expenses (1)
$(891) $(2,922) $(2,298) $(14,845)
____________________
(1)A portion of the accrual for losses for the three and nine months ended September 30, 2016 were reversed in December 2016 when we were relieved of our obligation to pay certain disputed costs as a result of Genentech’s unilateral change to its approach to the allocation of promotional expenses arising from commercialization of the COTELLIC plus Zelboraf combination therapy.
The U.S. losses under the Genentech Collaboration Agreement include our share of the net loss from the collaboration, as well as personnel and other costs we have incurred to co-promote COTELLIC plus Zelboraf in the U.S.
Royalty revenues from the Genentech Collaboration Agreement are based on amounts reported to us by Genentech and are recorded when such information becomes available to us. For prior periods, from the launch of COTELLIC through December 31, 2016, such information was not available until the following quarter, meaning that historically we recorded royalty revenues on a one quarter lag. Beginning in 2017, such information became available to us in the current quarter. As a result of this change, during the nine months ended September 30, 2017, in addition to the royalties reported to us for that period we also recorded $1.1 million in royalties for the sales activity related to the three months ended December 31, 2016.satisfied.
Takeda Collaboration
OnIn January 30, 2017, we entered into a collaboration and license agreement (the “Takeda Collaboration Agreement”) with Takeda. Under this collaboration agreement, as amended, Takeda for the commercialization and further clinical development of cabozantinib in Japan. Pursuant to the terms of the Takeda Collaboration Agreement, Takeda will havehas exclusive commercialization rights for current and potential future cabozantinib indications in Japan. The companiesJapan, and the parties have also agreed to collaborate on the clinical

development of cabozantinib in Japan. The operation and strategic direction of the parties’ collaboration is governed through a joint executive committee and appropriate subcommittees.
In consideration for the exclusive license and other rights contained in the Takeda Collaboration Agreement, Takeda paid us an upfront nonrefundable payment of $50.0 million in February 2017. We will be eligible to receive development, regulatory and first-sales milestones of up to $95.0 million related to second-line RCC, first-line RCC and second-line hepatocellular carcinoma (“HCC”), as well as additional development, regulatory and first-sale milestone payments for potential future indications. The Takeda Collaboration Agreement also provides that we will be eligible to receive pre-specified payments of up to $83.0 million associated with potential sales milestones. We will also receive royalties on net sales of cabozantinib in Japan at an initial tiered rate of 15% to 24% on net sales for the first $300.0 million of cumulative net sales. Thereafter, the royalty rate will be adjusted to 20% to 30% on annual net sales.
Takeda will be responsible for 20% of the costs associated with the global cabozantinib development plan’s current and future trials, provided Takeda opts to participate in such future trials, and 100% of costs associated with cabozantinib development activities that are exclusively for the benefit of Japan. Pursuant to the terms of the Takeda Collaboration Agreement, we will remain responsible for the manufacture and supply of cabozantinib for all development and commercialization activitiesRevenues under the collaboration. As part of the collaboration the parties will enter into appropriate supply agreementsagreement with Takeda were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
License revenues$9,780 $0 $32,726 $9,056 
Collaboration services revenues13,204 1,187 16,468 5,189 
Total$22,984 $1,187 $49,194 $14,245 
Milestone revenues for the manufacture and supply of cabozantinib for Takeda’s territory.
During the three and nine months ended September 30, 2017, collaboration2020 included $9.2 million in revenues underrecognized in connection with a $10.0 million milestone we expect to achieve upon Takeda’s and Ono Pharmaceutical Co., Ltd.’s supplemental application to the Takeda Collaboration Agreement were as follows (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
Amortization of upfront payment$2,830
 $7,547
Development cost reimbursements1,193
 3,301
Collaboration revenues under the Takeda Collaboration Agreement$4,023
 $10,848
There was no such revenue duringJapanese Ministry of Health, Labour and Welfare for Manufacturing and Marketing Approval of CABOMETYX in combination with Opdivo for the comparable periods in 2016. Astreatment of patients with unresectable, advanced or metastatic RCC. At September 30, 2017, short-term2020, we have not yet received this milestone payment.
During the third quarter of 2020, Takeda opted into and long-term deferred revenue relatingis now co-funding the development costs for CONTACT-01, CONTACT-02 and certain cohorts of COSMIC-021. Concurrently, we entered into the third amendment to the collaboration agreement with Takeda Collaboration Agreement(the Amendment), which modified certain cost sharing obligations related to the Japan-specific development costs associated with CONTACT-01 and CONTACT-02. We determined the Amendment represented a contract modification that was $11.3 million and $31.1 million, respectively.
The Takeda Collaboration Agreement may be terminated for cause by either party based on uncured material breach by the other party, bankruptcytreated as a termination of the other party or for safety reasons. For clarity, Takeda’s failure to achieve specified levels of commercial performance, based upon sales volume and/or promotional effort, during the first six years following the first commercial sale of cabozantinib in Japan shall constitute a material breach of the Takeda Collaboration Agreement. We may terminate the agreement if Takeda challenges or opposes any patent covered by the Takeda Collaboration Agreement. At any time prior to August 1, 2023, the parties may mutually agree to terminate the Takeda Collaboration Agreement if Japan’s Pharmaceuticals and Medical Devices Agency is unlikely to grant approval of the marketing authorization application in any cancer indication in Japan. After the commercial launch of cabozantinib in Japan, Takeda may terminate the Takeda Collaboration Agreement upon twelve months’ prior written notice following the third anniversary of the first commercial sale of cabozantinib in Japan. Upon termination by either party, all licenses granted by us to Takeda will automatically terminate,an existing contract and the licenses granted by Takedacreation of a new contract under Topic 606. As a result, we allocated the remaining transaction price to us shall survive such termination and shall automatically become worldwide.
the performance obligations identified in the contract. The Takeda Collaboration Agreement contains multiple deliverables consisting of intellectual property licenses, delivery of products and/or materials containing cabozantinib to Takeda for all development and commercial activities,two remaining performance obligations are the research and development services and participation on the joint executive, development and commercialization committees (as definedassociated with committed studies described in the Takeda“Note 3. Collaboration Agreement). We determined that these deliverables, other than the commercial supply and joint commercialization committee participation, are non-contingent in nature. The commercial supply deliverable was deemed contingent, primarily due to the fact that there is uncertainty around approval in Japan, which is dependent on successful clinical trial results from a study in Japanese patients. We also determined that the non-contingent deliverables do not have stand-alone value, because each one of them has value only if we meet our obligation as a whole to provide Takeda with research and development services, including clinical supply of cabozantinib under the Takeda Collaboration Agreement. Accordingly, we combined the non-contingent deliverables into a single unit of accounting and allocated the $50.0 million upfront fee to that combined unit of accounting. We also determined that the level of effort required of us to meet our obligations under the Takeda Collaboration Agreement is not expected to vary significantly over

the development periodAgreements” of the Takeda Collaboration Agreement. As a result, the upfront payment of $50.0 million, received in the first quarter of 2017, will be recognized ratably over the development period of the Takeda Collaboration Agreement of approximately four years. We determined that the development and regulatory milestones are substantive and will be recognized as revenue in the periods in which they are achieved. We consider the contingent payments dueNotes to us upon the achievement of specified sales volumes to be similar to royalty payments. We will record reimbursements for development costs as revenue as the development services represent a part of our ongoing major or central operations.
Bristol-Myers Squibb Collaboration - First-Line Advanced RCC, Bladder Cancer and HCC Combination Studies
In February 2017, we entered into a clinical trial collaboration agreement with Bristol-Myers Squibb Company(the “BMS Collaboration Agreement”) for the purpose of evaluating the combination of cabozantinib and nivolumab with or without ipilimumab in various tumor types, including, in RCC, HCC and bladder cancer. To date, a phase 3 trial in first-line advanced RCC and a phase 2 trial in HCC evaluating these combinations has been initiated. Pursuant to the terms of the BMS Collaboration Agreement, each party will grant to the other a non-exclusive, worldwide (within the collaboration territory as defined in the BMS Collaboration Agreement), non-transferable, royalty-free license to use the other party’s compounds in the conduct of each clinical trial. The parties’ efforts are governed through a joint development committee established to guide and oversee the collaboration’s operation. Each trial will be conducted under a combination Investigational New Drug Application, unless otherwise required by a regulatory authority. Each party will be responsible for supplying drug product for the applicable clinical trial in accordance with the terms of the supply agreement entered into between the parties in April 2017, and costs for each such trial will be shared equally between the parties, unless two Bristol-Myers Squibb Company (“BMS”) compounds will be utilized in such trial, in which case BMS will bear two-thirds of the costs and we will bear one-third of the costs for such study treatment arms. Unless earlier terminated, the BMS Collaboration Agreement will remain in effect until the completion of all clinical trials under the collaboration, all related trial data has been delivered to both parties and the completion of any then agreed upon analysis. Ipsen has opted in to participate in the phase 3 pivotal trial in first-line advanced RCC and will have access to the results to support potential future regulatory submissions. Ipsen may also participate in future studies at its choosing.
The Roche Group Collaboration
In February 2017, we established a clinical trial collaboration with The Roche Group (“Roche”) for the purpose of evaluating the safety and tolerability of cabozantinib in combination with Roche’s atezolizumab in patients with locally advanced or metastatic solid tumors. Each party is responsible for supplying drug product for the applicable clinical trial in accordance with the terms of the clinical supply agreement entered into by the parties in February 2017. Based on the dose-escalation results, the trial has the potential to enroll up to four expansion cohorts, including a cohort of patients with previously untreated advanced clear cell RCC and three cohorts of urothelial carcinoma, namely platinum eligible first-line patients, first or second-line platinum ineligible patients and patients previously treated with platinum-containing chemotherapy. The trial was initiated in June 2017 and is open for enrollment. We are the sponsor of the trial, and Roche is responsible for supplying atezolizumab to us. Ipsen has opted to participate in the study and will have access to the results to support potential future development in its territories.
GlaxoSmithKline Collaboration
In October 2002, we established a collaboration with GSK to discover and develop novel therapeutics in the areas of vascular biology, inflammatory disease and oncology. Under the terms of the product development and commercialization agreement, GSK had the right to choose cabozantinib for further development and commercialization, but notified us in October 2008 that it had waived its right to select the compound for such activities. As a result, we retained the rights to develop, commercialize, and license cabozantinib, subject to payment to GSK of a 3% royalty on net sales of any product incorporating cabozantinib. The product development and commercialization agreement was terminated during 2014, although GSK will continue to be entitled to a 3% royalty on net sales by us or our collaboration partners of any product incorporating cabozantinib, including COMETRIQ and CABOMETYX.
During the three and nine months ended September 30, 2017 and 2016, royalties owed to GSK in connection with the sales of COMETRIQ and CABOMETYX were as follows (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Royalties owed to GSK$3,446
 $1,277
 $8,809
 $2,495

Royalties owed to GSK are included in Cost of goods sold for sales by us and as a reduction of Collaboration revenues for sales by Ipsen in the accompanying Condensed Consolidated Statements of Operations.
Other Collaborations
During the nine months ended September 30, 2017, we recognized $2.5 million in contract revenues from a milestone payment received from BMS related to its ROR gamma program.
During the three and nine months ended September 30, 2016, we recognized $15.0 million in contract revenues from a milestone payment earned from Daiichi Sankyo Company, Limited (“Daiichi Sankyo”) related to its worldwide license of our compounds that modulate the mineralocorticoid receptor (“MR”), including CS-3150 (an isomer of XL550). During the nine months ended September 30, 2016, we also recognized $5.0 million in contract revenues from a milestone payment earned from Merck related to its worldwide license of our phosphoinositide-3 kinase-delta program.
See “Note 2 - Collaboration Agreements” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed2019, and the research and development services associated with CONTACT-01, CONTACT-02, and certain cohorts of COSMIC-021 studies. In allocating the transaction price for the modified contract we estimated the standalone selling price for the performance obligations. We utilized development costs incurred for these obligations in process and the projections of costs through the term of the arrangement. Revenue is recognized when, or as, we satisfy our performance obligations by transferring the promised services to Takeda. Revenue is being recognized using the cost proportional performance method, based on costs incurred to perform the research and development services, since the level of costs incurred over time is thought to best reflect the transfer of services to Takeda.
15
Table of Contents
We are eligible to receive additional regulatory and development milestone payments, without contractual limit, for additional potential future indications. We are further eligible to receive sales-based milestones, including milestone payments earned for the first commercial sale of a product, of up to $124.0 million. We excluded these milestones from the transaction price as of September 30, 2020 because we determined such payments to be fully constrained under Topic 606 due to the fact that it was not probable that a significant reversal of cumulative revenue would not occur, given the inherent uncertainty of success with these milestones. We will re-evaluate the transaction price at each reporting period and as uncertain events are resolved or other changes in circumstances occur.
As of September 30, 2020, $46.3 million of the transaction price was allocated to our research and development services performance obligations that has not yet been satisfied.
GSK
In October 2002, we established a product development and commercialization collaboration agreement with GSK. We are required to pay a 3% royalty to GSK on the net sales of any product incorporating cabozantinib by us and our collaboration partners. Royalties earned by GSK in connection with the SECsales of cabozantinib are included in cost of goods sold for sales by us and as a reduction of collaboration services revenues for sales by our collaboration partners. Such royalties were $7.9 million and $23.7 million during the three and nine months ended September 30, 2020, respectively, as compared to $8.0 million and $23.1 million during the comparable periods in 2019.
Genentech Collaboration
In December 2006, we out-licensed the development and commercialization of cobimetinib to Genentech under a worldwide collaboration agreement. In November 2015, the U.S. Food and Drug Administration (FDA) approved cobimetinib, under the brand name COTELLIC, in combination with Genentech’s ZELBORAF® (vemurafenib) for the treatment of patients with BRAF V600E or V600K mutation-positive advanced melanoma. COTELLIC in combination with ZELBORAF has also been approved in the European Union and multiple additional countries for use in the same indication. In July 2020, the FDA also approved COTELLIC for use in combination with ZELBORAF and TECENTRIQ® (atezolizumab) for the treatment of patients with BRAF V600 mutation-positive advanced melanoma in previously untreated patients. License revenues under the collaboration agreement with Genentech were as follows (in thousands):
 Three Months Ended September 30,Nine Months Ended September 30,
 2020201920202019
Profits on U.S. commercialization$1,595 $1,102 $4,378 $3,507 
Royalty revenues on ex-U.S. sales$1,370 $1,614 $3,804 $4,426 
In-Licensing Collaborations
Redwood Bioscience, Inc., R.P. Scherer Technologies, LLC, Catalent Pharma Solution LLC Collaboration
In September 2020, we entered into a collaboration and license agreement with Catalent, Inc.’s wholly owned subsidiaries Redwood Bioscience, Inc., R.P. Scherer Technologies, LLC and Catalent Pharma Solutions, Inc., (individually and collectively referred to as Catalent). Under the terms of the agreement, we made an upfront payment of $10.0 million in exchange to nominate and have the exclusive option to license four targets using Catalent’s ADC platform over a three-year period. In addition, we have a right to extend the target selection term to five years and nominate up to two additional targets for an additional payment of $4.0 million. We will also contribute research funding to Catalent for discovery and preclinical development work. For each option we decide to exercise, we will pay an exercise fee of $2.0 million, and would assume responsibilities for all subsequent clinical development, commercialization and global manufacturing of that program. Catalent would then become eligible to receive up to $44.0 million per compound in potential development milestone payments, $60.0 million per product in potential commercial milestone payments, as well as royalties on February 27, 2017potential sales.
NBE Therapeutics AG (NBE) Collaboration
In September 2020, we entered into a collaboration and license agreement with NBE. Under the terms of the agreement, we made an upfront payment of $25.0 million in exchange for exclusive options to nominate four targets using NBE’s ADC platform over a descriptiontwo-year period. In addition, within the first eighteen months of our existing collaboration agreements.the agreement, we also have a right to extend the target selection term to three years for an additional payment of $2.0 million. We will also contribute research funding to NBE for discovery and preclinical development work. For each option we decide to exercise, we will be
16
Table of Contents
required to pay an exercise fee of $10.0 million, and would assume responsibilities for all subsequent clinical development, commercialization and global manufacturing of that program. NBE would then become eligible to receive up to $90.0 million per program in potential development milestone payments, $135.0 million per program in potential commercial milestone payments, as well as royalties on potential sales.
NOTE 3:4. CASH AND INVESTMENTS
AllCash, Cash Equivalents and Restricted Cash Equivalents
A reconciliation of ourcash, cash equivalents, and investments are classified as available-for-sale. The following tables summarize cash andrestricted cash equivalents investments, and restricted cash and investments by balance sheet line item as of September 30, 2017 and December 31, 2016 (in thousands):
 September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
Cash and cash equivalents$149,357
 $—
 $—
 $149,357
Short-term investments217,805
 17
 (81) 217,741
Long-term investments50,557
 41
 (29) 50,569
Long-term restricted cash and investments4,650
 —
 —
 4,650
Total cash and investments$422,369
 $58
 $(110) $422,317
 December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
Cash and cash equivalents$151,686
 $—
 $—
 $151,686
Short-term investments268,234
 13
 (130) 268,117
Long-term investments55,792
 1
 (192) 55,601
Long-term restricted cash and investments4,150
 —
 —
 4,150
Total cash and investments$479,862
 $14
 $(322) $479,554
Under our loan and security agreement with Silicon Valley Bank, we were required to maintain compensating balances on depositreported in one or more investment accounts with Silicon Valley Bank or one of its affiliates. The total collateral balance of $81.6 million as of December 31, 2016 is reflected in ourthe accompanying Condensed Consolidated Balance Sheet in short-term investments;Sheets to the amount reported within the accompanying Condensed Consolidated Statements of Cash Flows was as a resultfollows (in thousands):
 September 30, 2020December 31, 2019
Cash and cash equivalents$334,046 $266,501 
Restricted cash equivalents included in long-term investments1,636 1,636 
Cash, cash equivalents, and restricted cash equivalents as reported in the accompanying Condensed Consolidated Statements of Cash Flows$335,682 $268,137 
Restricted cash equivalents consisted of our repaymentcertificates of deposit with original maturities of 90 days or less used to collateralize letters of credit. The long-term classification of restricted cash equivalents is based upon the remaining term of the term loan with Silicon Valley Bank, the compensating balance requirement was terminated as of March 29, 2017. See “Note 7 - Debt” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 27, 2017 for more information regarding the collateral balance requirements under our Silicon Valley Bank loanunderlying restriction.
Cash and security agreement.Investments

The following tables summarize our cash equivalentsCash and investments by security typeconsisted of the following (in thousands):
September 30, 2020
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Debt securities available-for-sale:
Commercial paper$466,141 $225 $0 $466,366 
Corporate bonds629,309 7,526 (20)636,815 
U.S. Treasury and government-sponsored enterprises213,449 354 (10)213,793 
Municipal bonds20,326 105 0 20,431 
Total debt securities available-for-sale1,329,225 8,210 (30)1,337,405 
Cash55,979 0 0 55,979 
Money market funds96,992 0 0 96,992 
Certificates of deposit55,583 1 0 55,584 
Total cash and investments$1,537,779 $8,211 $(30)$1,545,960 
December 31, 2019
Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Debt securities available-for-sale:
Commercial paper$389,573 $0 $0 $389,573 
Corporate bonds752,295 3,934 (3)756,226 
U.S. Treasury and government-sponsored enterprises166,483 187 (5)166,665 
Total debt securities available-for-sale1,308,351 4,121 (8)1,312,464 
Cash40,964 0 0 40,964 
Money market funds2,467 0 0 2,467 
Certificates of deposit32,728 5 0 32,733 
Total cash and investments$1,384,510 $4,126 $(8)$1,388,628 
17
Table of Contents
Interest receivable was $4.5 million and $6.2 million as of September 30, 20172020 and December 31, 2016. The amounts presented exclude cash, but include investments classified as cash equivalents (in thousands):2019, respectively, and is included in prepaid expenses and other current assets in the accompanying Condensed Consolidated Balance Sheets.
 September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
Money market funds$42,797
 $—
 $—
 $42,797
Commercial paper168,738
 —
 —
 168,738
Corporate bonds187,197
 58
 (95) 187,160
U.S. Treasury and government sponsored enterprises14,659
 —
 (15) 14,644
Total investments$413,391
 $58
 $(110) $413,339
 December 31, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 Fair Value
Money market funds$71,457
 $—
 $—
 $71,457
Commercial paper165,375
 —
 —
 165,375
Corporate bonds152,712
 3
 (308) 152,407
U.S. Treasury and government sponsored enterprises70,730
 11
 (14) 70,727
Total investments$460,274
 $14
 $(322) $459,966
GainsRealized gains and losses on the sales of investments available-for-sale were nominal or zeroinsignificant during the three and nine months ended September 30, 20172020 and 2016.2019.
We manage credit risk associated with our investment portfolio through our investment policy, which limits purchases to high-quality issuers and limits the amount of our portfolio that can be invested in a single issuer. The fair value and gross unrealized losses on debt securities available-for-sale in an unrealized loss position were as follows (in thousands):
September 30, 2020
Fair ValueGross Unrealized Losses
Corporate bonds$29,627 $(20)
U.S. Treasury and government-sponsored enterprises70,465 (10)
Total$100,092 $(30)
December 31, 2019
Fair ValueGross Unrealized Losses
Corporate bonds$14,529 $(3)
U.S. Treasury and government-sponsored enterprises2,848 (5)
Total$17,377 $(8)
All securities presented have been in an unrealized loss position less than 12 months. There were 16 and 9 investments in an unrealized loss position as of our investments are subject to a quarterly impairment review.September 30, 2020 and December 31, 2019, respectively. During the nine months ended September 30, 20172020 and 20162019, we did not0t record any other-than-temporaryan allowance for credit losses or other impairment charges on our available-for-saleinvestment securities. As of September 30, 2017, there were 84 investments in an unrealized loss position with gross unrealized losses of $0.1 million and an aggregate fair value of $134.9 million. The investments in an unrealized loss position comprise corporate bonds with an aggregate fair value of $124.9 million and securities issued by U.S. Treasury and government sponsored enterprises with an aggregate fair value of $10.0 million. TheBased upon our quarterly impairment review, we determined that the unrealized losses were not attributed to credit risk but ratherwere primarily associated with the changes in interest rates.rates and market liquidity. Based on the scheduled maturities of our investments, we concludeddetermined that the unrealized losses in our investment securities are not other-than-temporary, as it iswas more likely than not that we will hold these investments for a period of time sufficient for a recovery of our cost basis.
The following table summarizes the fair value of debt securities classified as available-for-sale by contractual maturity was as of September 30, 2017follows (in thousands):
 September 30, 2020December 31, 2019
Maturing in one year or less$993,211 $789,913 
Maturing after one year through five years344,194 522,551 
Total debt securities available-for-sale$1,337,405 $1,312,464 
 Mature within One Year After One Year through Five Years Fair Value
Money market funds$42,797
 $—
 $42,797
Commercial paper168,738
 —
 168,738
Corporate bonds136,592
 50,568
 187,160
U.S. Treasury and government sponsored enterprises14,644
 —
 14,644
Total investments$362,771
 $50,568
 $413,339
Cash is excluded from the table above. The classification of certain restricted investments is dependent upon the term of the underlying restriction on the asset and not the maturity date of the investment. Therefore, certain long-term restricted cash and investments have contractual maturities within one year.

NOTE 4.5. FAIR VALUE MEASUREMENTS
Fair value reflects the amounts that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy has the following three levels:
•Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities;
•Level 2 - inputs other than level 1 that are observable either directly or indirectly, such as quoted prices in active markets for similar instruments or on industry models using data inputs, such as interest rates and prices that can be directly observed or corroborated in active markets;
•Level 3 - unobservable inputs that are supported by little or no market activity that are significant to the fair value measurement
18
Table of Contents
The classifications within the fair value hierarchy of our financial assets that were measured and recorded at fair value on a recurring basis were as follows (in thousands):
September 30, 2020
Level 1Level 2Total
Commercial paper$0 $466,366 $466,366 
Corporate bonds0 636,815 636,815 
U.S. Treasury and government-sponsored enterprises0 213,793 213,793 
Municipal bonds0 20,431 20,431 
Total debt securities available-for-sale0 1,337,405 1,337,405 
Money market funds96,992 0 96,992 
Certificates of deposit0 55,584 55,584 
Total financial assets carried at fair value$96,992 $1,392,989 $1,489,981 
December 31, 2019
Level 1Level 2Total
Commercial paper$0 $389,573 $389,573 
Corporate bonds0 756,226 756,226 
U.S. Treasury and government-sponsored enterprises0 166,665 166,665 
Total debt securities available-for-sale0 1,312,464 1,312,464 
Money market funds2,467 0 2,467 
Certificates of deposit0 32,733 32,733 
Total financial assets carried at fair value$2,467 $1,345,197 $1,347,664 
When available, we value investments based on quoted prices for those financial instruments, which is a Level 1 input. Our remaining investments are valued using third-party pricing sources, which use observable market prices, interest rates and yield curves observable at commonly quoted intervals for similar assets as observable inputs for pricing, which is a Level 2 input.
The carrying amount of our remaining financial assets and liabilities, which include cash, receivables and payables, approximate their fair values due to their short-term nature.
NOTE 6. INVENTORY
Inventory consistsconsisted of the following (in thousands):
 September 30, 2020December 31, 2019
Raw materials$5,298 $2,709 
Work in process17,911 9,447 
Finished goods4,535 4,367 
Total$27,744 $16,523 
Balance Sheet classification:
Current portion included in inventory$19,319 $12,886 
Long-term portion included in other long-term assets8,425 3,637 
Total$27,744 $16,523 
 September 30,
2017		 December 31,
2016
Raw materials$378
 $863
Work in process2,951
 2,343
Finished goods2,856
 738
Total6,185
 3,944
Less: non-current portion included in Other long-term assets(379) (606)
Inventory, net$5,806
 $3,338
We generally relieve inventory on a first-expiry, first-out basis. A portion of the manufacturing costs for inventory was incurred prior to regulatory approval of CABOMETYX and COMETRIQ and therefore was expensed as research and development costs when those costs were incurred, rather than capitalized as inventory. Write-downs related to excess and expiring inventory are charged to either Cost of goods sold or the cost of supplied product included in Collaboration revenues. Such write-downs were $1.2$2.2 million and $0.4 million for the nine months ended September 30, 20172020 and $0.4 million for the comparable period in 2016. The non-current portion2019, respectively.
19
Table of inventory is expected to be used or sold in future periods more than 12 months from the date presented. As of September 30, 2017, the non-current portion of inventory consists of finished goods. As of December 31, 2016, the non-current portion of inventory consists of raw materials and a portion of the active pharmaceutical ingredient that is included in work in process inventories.
Contents
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands): 
 September 30,
2017		 December 31,
2016
Computer equipment and software$14,242
 $13,738
Leasehold improvements4,715
 6,646
Laboratory equipment5,836
 4,310
Furniture and fixtures1,954
 2,240
Construction-in-progress15,627
 19
 42,374
 26,953
Less: accumulated depreciation and amortization(23,118) (24,882)
Property and equipment, net$19,256
 $2,071
Depreciation expense was $0.8 million during both the nine months ended September 30, 2017 and 2016.
Build-to-Suit Lease
On May 2, 2017, we entered into a Lease Agreement (the “Lease”) with Ascentris 105, LLC (“Ascentris”), to lease 110,783 square feet of space in office and research facilities located at 1851, 1801, and 1751 Harbor Bay Parkway, Alameda, California (the “Premises”). On October 16, 2017, we executed an amendment to the Lease for 19,778 square feet of additional space located at the Premises with terms consistent with the original Lease. See “Note 12. Commitments” for a description of the Lease.
In connection with the Lease, we received a tenant improvement allowance of $6.7 million from Ascentris, for the costs associated with the design, development and construction of tenant improvements for the Premises. We are obligated to fund all costs incurred in excess of the tenant improvement allowance and to certain indemnification obligations related to the construction activities. We evaluated our involvement during the construction period and determined the scope of the tenant improvements on portions of the Premises including the building shells did not qualify as “normal tenant improvements” under Accounting Standards Codification topic 840, Leases. Accordingly, for accounting purposes, we are the deemed owner of such portions of the Premises during the construction period. As such, we will capitalize the construction costs as a build-to-suit property within property and equipment, net, including the estimated fair value of the

building shells that we are deemed to own at the lease inception date, as determined using a third-party appraisal. The capitalized construction costs will also include the estimated tenant improvements incurred by Ascentris. Accordingly, we capitalized $14.5 million of costs related to the Lease in construction-in-progress as of May 2, 2017, with a corresponding build-to-suit lease obligation in Other long-term liabilities. As of September 30, 2017, we have capitalized an additional $0.5 million to construction in progress for improvements to the Premises.
Once the construction is complete, we will consider the requirements for sale-leaseback accounting treatment, including evaluating whether all risks of ownership have been transferred back to Ascentris, as evidenced by a lack of continuing involvement in the leased property. If the arrangement does not qualify for sale-leaseback accounting treatment, the building assets will remain on our consolidated balance sheets at their historical cost.
NOTE 6. DEBT
The amortized carrying amount of our debt consists of the following (in thousands):
 September 30,
2017		 December 31,
2016
Secured Convertible Notes due 2018 (“Deerfield Notes”)$—
 $109,122
Term loan payable—
 80,000
Total debt$—
 $189,122
See “Note 7 - Debt” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 27, 2017 for additional information on the terms of our debt, including a description of the material features of the Deerfield Notes.
Deerfield Notes
On June 28, 2017, we repaid all amounts outstanding under the Deerfield Notes. The repayment amount totaled $123.8 million which comprised $113.9 million in principal, including $13.9 million of interest paid in kind paid through the repayment date, a $5.8 million prepayment penalty associated with the early repayment of the notes and $4.2 million in accrued and unpaid interest. As a result of the early repayment, there was a $6.2 million loss on the extinguishment of the debt which comprised the prepayment penalty and the unamortized fees and costs on the date of the repayment.
Prior to our early repayment of the notes, the outstanding principal amount of the Deerfield Notes bore interest at the rate of 7.5% per annum to be paid in cash, quarterly in arrears, and 7.5% per annum to be paid in kind, quarterly in arrears, for a total interest rate of 15% per annum. The following is a summary of interest expense for the Deerfield Notes (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Stated coupon interest$—
 $2,031
 $4,151
 $5,939
Interest paid in kind—
 2,031
 4,151
 5,939
Amortization of debt discount and debt issuance costs—
 121
 182
 327
Total interest expense$—
 $4,183
 $8,484
 $12,205
The balance of unamortized fees and costs was $0.4 million as of December 31, 2016, which was recorded as a reduction of the carrying amount of the Deerfield Notes on the accompanying Condensed Consolidated Balance Sheet.
Silicon Valley Bank Loan and Security Agreement
On March 29, 2017, we repaid all amounts outstanding under our term loan with Silicon Valley Bank. The repayment included $80.0 million in principal plus $0.1 million in accrued and unpaid interest. There was no gain or loss on the extinguishment of debt as a result of the repayment of the term loan. Prior to our early repayment of the term loan, the principal amount outstanding under the term loan had accrued interest at 1.0% per annum, which was due and payable monthly.
In accordance with the terms of the loan and security agreement, we were required to maintain an amount equal to at least 100%, but not to exceed 107%, of the outstanding principal balance of the term loan on deposit in one or more

investment accounts with Silicon Valley Bank or one of its affiliates as support for our obligations under the loan and security agreement. We were entitled to retain income earned on the amounts maintained in such accounts. The total collateral balance as of December 31, 2016 was $81.6 million and was reflected in our Condensed Consolidated Balance Sheet in Short-term investments as the amounts were not restricted as to withdrawal. As a result of our repayment of the term loan, the compensating balance requirement was terminated as of March 29, 2017.
NOTE 7. 2014 WARRANTS
In connection with an amendment to the note purchase agreement for the Secured Convertible Notes due 2015, (the “Original Deerfield Notes”), in January 2014 we issued two-year warrants to purchase an aggregate of 1,000,000 shares of our common stock at an exercise price of $9.70 per share (the “2014 Warrants”). Subsequent to our March 2015 notification of our election to extend the maturity date of the Deerfield Notes, the exercise price of the 2014 Warrants was reset to $3.445 per share, the term was extended by two years to January 22, 2018, and the 2014 Warrants were transferred to Additional paid-in capital as of that date at their then estimated fair value of $1.5 million as their terms had become fixed.
On September 11, 2017, we issued an aggregate of 877,451 shares of common stock pursuant to the cashless exercises of the 2014 Warrants issued to an accredited investor transferee. The number of shares issued upon exercise was net of 122,549 shares withheld to effect the cashless exercise of the 2014 Warrants in accordance with their terms.
NOTE 8. STOCK-BASED COMPENSATION
We recorded and allocated employee stock-based compensation expense for our equity incentive plans and our 2000 Employee Stock Purchase Plan (“ESPP”) as follows (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Research and development expense$1,663
 $1,165
 $4,741
 $7,894
Selling, general and administrative expense3,626
 2,438
 10,288
 10,452
Total stock-based compensation expense$5,289
 $3,603
 $15,029
 $18,346
We use the Black-Scholes Merton option pricing model to value our stock options and ESPP purchases. The weighted average grant-date fair value per share of our stock options and ESPP purchases was as follows:
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Stock options$11.75
 $8.59
 $10.32
 $4.31
ESPP$6.85
 $1.51
 $5.29
 $1.65
The fair value of stock options and ESPP purchases was estimated using the following assumptions:
 Stock Options
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Risk-free interest rate1.70% 1.07% 1.68% 1.09%
Dividend yield—% —% —% —%
Expected volatility58% 76% 61% 76%
Expected life4.0 years
 4.5 years
 4.1 years
 4.4 years

 ESPP
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Risk-free interest rate1.14% 0.37% 0.88% 0.39%
Dividend yield—% —% —% —%
Expected volatility55% 63% 61% 66%
Expected life6 months
 6 months
 6 months
 6 months
We considered implied volatility as well as our historical volatility in developing our estimate of expected volatility. The expected life computation is based on historical exercise patterns and post-vesting termination behavior.
A summary of stock option activity for the nine months endedSeptember 30, 2017 is presented below (dollars in thousands, except per share amounts):
 Shares 
Weighted
Average
Exercise Price Per Share
 
Weighted
Average
Remaining Contractual
Term
 
Aggregate
Intrinsic
Value
Options outstanding at December 31, 201624,999,665
 $4.91
    
Granted821,260
 $21.60
    
Exercised(4,282,847) $3.94
    
Forfeited(204,525) $8.14
    
Options outstanding at September 30, 201721,333,553
 $5.72
 4.08 years $395,212
Exercisable at September 30, 201715,961,685
 $4.41
 3.59 years $316,415
As of September 30, 2017, a total of 24,037,291 shares were available for grant under our stock option plans.
A summary of restricted stock unit (“RSU”) activity for the nine months endedSeptember 30, 2017 is presented below (dollars in thousands, except per share amounts):
 Shares 
Weighted
Average
Grant Date
Fair Value Per Share
 
Weighted
Average
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
RSUs outstanding at December 31, 20162,469,791
 $8.69
    
Awarded331,847
 $22.03
    
Vested and released(348,294) $4.63
    
Forfeited(111,603) $10.89
    
RSUs outstanding at September 30, 20172,341,741
 $11.08
 1.55 years $56,740
NOTE 9. INCOME TAXES
Income tax expense consists of the following (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Income tax expense$3,206
 $—
 $3,921
 $—
During the nine months ended September 30, 2017, we recorded income tax expense of $3.9 million, which primarily comprises our computed income tax expense of $5.2 million reduced by $1.2 million of excess benefits associated with equity compensation. The income tax expense for the three and nine months ended September 30, 2017 primarily relates to state taxes in jurisdictions outside of California, for which we do not have net operating loss carry-forwards due to a limited operating history.

NOTE 10. NET INCOME (LOSS) PER SHARE
The following table sets forth a reconciliation of basic and diluted net income (loss) per share (in thousands, except per share amounts):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Net income (loss)$81,382
 $(11,284) $115,738
 $(105,345)
Net income allocated to participating securities(221) —
 (368) —
Net income allocable to common stock for basic net income (loss) per share81,161
 (11,284) 115,370
 (105,345)
Adjustment to net income allocated to participating securities14
 —
 23
 —
Net income allocable to common stock for diluted net income (loss) per share$81,175
 $(11,284) $115,393
 $(105,345)
        
Weighted-average shares of common stock outstanding294,269
 256,319
 292,776
 238,024
Dilutive securities:       
Outstanding stock options, unvested RSUs and ESPP contributions18,671
 —
 18,779
 —
Weighted-average shares of common stock outstanding and dilutive securities312,940
 256,319
 311,555
 238,024
        
Net income (loss) per share, basic$0.28
 $(0.04) $0.39
 $(0.44)
Net income (loss) per share, diluted$0.26
 $(0.04) $0.37
 $(0.44)
The 2014 Warrants were participating securities and the warrant holders did not have a contractual obligation to share in our losses. See “Note 7 - 2014 Warrants” for a description of the 2014 Warrants.
The following table sets forth potentially dilutive shares of common stock that are not included in the computation of diluted net income (loss) per share because to do so would be anti-dilutive (in thousands): 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Outstanding stock options, unvested RSUs and ESPP contributions583
 30,474
 1,108
 30,474
Deerfield Notes—
 33,890
 —
 33,890
4.25% convertible senior subordinated notes due 2019 (the “2019 Notes”)—
 413
 —
 413
2014 Warrants—
 1,000
 —
 1,000
Total potentially dilutive shares583
 65,777
 1,108
 65,777
The 2014 Warrants were exercised in September 2017. The Deerfield Notes were repaid in June 2017. The 2019 Notes were converted and redeemed between August and November 2016.

NOTE 11. FAIR VALUE MEASUREMENTS7. STOCK-BASED COMPENSATION
We allocated the stock-based compensation expense for our equity incentive plans and our 2000 Employee Stock Purchase Plan (ESPP) as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Research and development$18,936 $4,301 $30,134 $13,745 
Selling, general and administrative36,719 8,838 55,657 27,002 
Total stock-based compensation$55,655 $13,139 $85,791 $40,747 
As of September 30, 2020, 16,900,406 shares were available for grant under the Exelixis, Inc. 2017 Equity Incentive Plan (as amended and restated, the 2017 Plan). The following table sets forthshare reserve is reduced by 1 share for each share issued pursuant to a stock option or stock appreciation award and 1.5 shares for full value awards granted in the classificationform of restricted stock units (RSUs). On May 20, 2020, at our financial assets within2020 Annual Meeting of Stockholders, our stockholders approved the amendment and restatement of the 2017 Plan. The amendment and restatement increased the share reserve under the 2017 Plan by 21,000,000 shares, subject to adjustment for certain changes in our capitalization, which became effective immediately upon stockholder approval. 
During the nine months ended September 30, 2020, we granted 1,189,888 stock options with a weighted average exercise price of $21.84 per share and a weighted average grant date fair value hierarchy thatof $9.61 per share. As of September 30, 2020, there were measured16,219,326 stock options outstanding and recorded at$28.4 million unrecognized compensation expense.
During the nine months ended September 30, 2020, we granted 2,813,888 service-based RSUs with a weighted average grant date fair value on a recurring basis as of $23.56 per share. As of September 30, 2017 and December 31, 2016. We did not have any financial liabilities measured and recorded at fair value on a recurring basis as of those dates. The amounts presented exclude cash, but include investments classified as cash equivalents (in thousands):
 September 30, 2017
 Level 1 Level 2 Total
Money market funds$42,797
 $—
 $42,797
Commercial paper—
 168,738
 168,738
Corporate bonds—
 187,160
 187,160
U.S. Treasury and government sponsored enterprises—
 14,644
 14,644
Total financial assets$42,797
 $370,542
 $413,339
 December 31, 2016
 Level 1 Level 2 Total
Money market funds$71,457
 $—
 $71,457
Commercial paper—
 165,375
 165,375
Corporate bonds—
 152,407
 152,407
U.S. Treasury and government sponsored enterprises—
 70,727
 70,727
Total financial assets$71,457
 $388,509
 $459,966
We did not have any financial assets or liabilities classified as Level 3 in the fair value hierarchy as of September 30, 2017 or December 31, 2016 and2020, there were no transfers of financial assets or liabilities classified as Level 36,554,909 RSUs outstanding and $111.9 million unrecognized compensation expense.
Stock options and RSUs granted to employees during the nine months ended September 30, 2017 or the year ended December 31, 2016.
The carrying amounts2020 have vesting conditions and contractual lives of cash, trade and other receivables, accounts payable, accrued clinical trial liabilities, accrued compensation and benefits, and other liabilities approximate their fair values and are excluded from the tables above.
When available, we value investments based on quoted prices fora similar nature to those financial instruments, which is a Level 1 input. Our remaining investments are valued using third-party pricing sources, which use observable market prices, interest rates and yield curves observable at commonly quoted intervals of similar assets as observable inputs for pricing, which are Level 2 inputs.
NOTE 12. COMMITMENTS
Leases
On May 2, 2017, we entered into the Lease with Ascentris for an aggregate of 110,783 square feet of spacedescribed in office and research facilities located at the Premises in Alameda, California. We also have the right to make certain tenant improvements to the space leased on the Premises. The Lease has an initial term of 10 years with a target commencement date of February 1, 2018, and, subject to a partial twelve-month rent abatement period, rent payments will begin upon the target commencement date. We have two five-year options to extend the Lease and a one-time option to terminate the Lease without cause on the last day“Note 8. Employee Benefit Plans” of the 8th year of the initial term. We are obligatedNotes to make lease payments totaling $24.1 million over the Lease term. The Lease further provides that we are obligated to pay to Ascentris certain costs, including taxes and operating expenses. We also have a right of first offer to lease certain additional space, in the aggregate of approximately 170,000 square feet of space, as that additional space becomes available over the remainder of the initial term at 1601, 1701, 1751, and 1801 Harbor Bay Parkway, Alameda, California at a market rate determined according to the Lease.
We are deemed, for accounting purposes only, to be the owner of portions of the Premises, including two building shells, even though we are not the legal owner. See “Note 5. Property and Equipment - Build-to-Suit Lease” for a further description of the accounting for that portion of the Premises.

On May 2, 2017, we also entered into an Agreement for Conditional Option to Amend Lease (the “Optional Amendment Agreement”) with Ascentris. Under the terms of the Optional Amendment Agreement, a current tenant (the “Tenant”) occupying approximately 16,343 square feet of the facility located at 1801 Harbor Bay Parkway was given the option to relocate to another building on the premises or terminate their current lease early, requiring them to relocate within six months from the termination date. Under the terms of the Optional Amendment Agreement, we would reimburse Ascentris for the first $1.5 million of costs incurred to induce the Tenant to relocate. In August 2017, the Tenant communicated to Ascentris that they were terminating their lease early. As of September 30, 2017, we have accrued $1.4 million for our anticipated reimbursement of costs to Ascentris for the Tenant’s relocation. On October 16, 2017, we executed an amendment to the Lease for an additional 19,778 square feet of space located on the Premises, which includes the space vacated by the Tenant, with terms consistent with the original Lease.
As of September 30, 2017, the aggregate future minimum lease payments under our leases are as follows (in thousands): 
 Operating leases 
Other financing obligations (1)
Remainder of 2017$1,006
 $—
Year Ending December 31,   
20182,802
 566
2019605
 1,477
2020630
 1,685
2021637
 1,745
2022646
 1,814
Thereafter3,465
 10,441
 $9,791
 $17,728
____________________
(1)Other financing obligations includes payments related to our build-to-suit lease.
Rent expense and sublease income were as follows for the periods presented (in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Gross rental expense$1,215
 $1,972
 $4,986
 $7,424
less: Sublease income—
 (908) (1,225) (2,637)
Net rental expense$1,215
 $1,064
 $3,761
 $4,787
Letter of Credit
We obtained a standby letter of credit in May 2017 in the amount of $0.5 million, which may be drawn down by Ascentris in the event we fail to fully and faithfully perform all of our obligations under the Lease and to compensate Ascentris for all losses and damages Ascentris may suffer as a result of the occurrence of any default on our part not cured within the applicable cure period. As of September 30, 2017, none of the standby letter of credit amount has been used.
See “Note 13 - Commitments” to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with2019.
During the SEC on February 27, 2017 for a description of additional letters of credits that were entered into prior to year ended December 31, 2016.2018, in connection with our long-term incentive compensation program, we granted 308,365 performance-based stock options (PSOs) to our President and Chief Executive Officer. In addition to the standard service-based vesting conditions included in our other stock options, these PSOs contain a market vesting condition such that they may not be exercised until, at any time after the grant date, the closing market price of our Common Stock is equal to or greater than 125% of the per share exercise price of the PSOs over a period of at least 30 consecutive calendar days. This market vesting condition was achieved during the three months ended June 30, 2020. The stock-based compensation expense for the PSOs is being recognized on an accelerated basis over the service period of the award, which commenced on the date of grant. The achievement of the market vesting condition did not impact the compensation expense recognized during the period.
NOTE 13. CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject us to concentrations of credit risk are primarily trade and other receivables and investments. Investments consist of money market funds, commercial paper, corporate bonds with high credit quality, and securities issued by the U.S. Treasury and other government sponsored enterprises. All investments are maintained with financial institutions that management believes are creditworthy.
Trade and other receivables are unsecured and are concentrated in the pharmaceutical and biotechnology industries. Accordingly, we may be exposed to credit risk generally associated with pharmaceutical and biotechnology

companies. We have incurred no bad debt expense since inception. As of September 30, 2017, 55%2020, there were 8,186,977 performance-based restricted stock units (PSUs) outstanding with $129.7 million in related unrecognized compensation expense. Expense recognition for PSUs commences when it is determined that achievement of the performance target is probable. Of the outstanding PSUs, 188,624 relate to awards for which we achieved the performance target during 2019 or had determined during 2019 that it was probable that we would achieve the performance target during 2020. During 2020, we determined that it had become probable that we would achieve additional performance targets for 2,947,563 additional PSUs granted during 2018 and 2019. Total stock-based compensation expense for PSUs was $41.2 million and $43.2 million during the three and nine months ended September 30, 2020, respectively. For more information about our PSUs, see “Note 8. Employee Benefit Plans” of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
In September 2020, in connection with our long-term incentive compensation program, we awarded 1,951,830 PSUs (the target amount) that will vest upon the achievement of certain performance targets related to clinical trial positive top-line results and product approvals by the FDA (the 2020 PSUs). Employees may earn up to 200% of the target amount or 3,903,660 shares, depending on the volume and the timing of achievement of theperformance targets. The 2020 PSUs
20
Table of Contents
were designed to drive the performance of our trade receivablesmanagement team and employees toward the achievement of key corporate objectives and will be forfeited if the performance targets are with Ipsen, which includenot met by December 31, 2024.
NOTE 8. INCOME TAXES
Our effective income tax rate was 15.7% and 18.8% during the amountsthree and nine months ended September 30, 2020, respectively, as compared to 20.5% and 19.4% for the comparable periods in 2019. The effective tax rate for the three and nine months ended September 30, 2020 differed from U.S. federal statutory tax rate of 21% primarily due from two milestones totaling $45.0 million resulting from Ipsen’s receiptto excess tax benefits related to the exercise of certain stock options and federal tax credits, offset by the validationnon-deductible executive compensation during the periods. The effective tax rate for the three and nine months ended September 30, 2019 differed from the EMA for the application for variationU.S. federal statutory rate of 21% primarily due to excess tax benefits related to the CABOMETYX marketing authorizationexercise of certain stock options and federal tax credits during the periods.
NOTE 9. NET INCOME (LOSS) PER SHARE
Net income (loss) per share - basic and diluted, were computed as follows (in thousands, except per share amounts):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Numerator:
Net income (loss)$(32,040)$97,452 $83,393 $252,269 
Denominator:
Weighted-average common shares outstanding — basic309,116 303,268 307,437 301,999 
Dilutive securities0 12,185 10,058 13,047 
Weighted-average common shares outstanding — diluted309,116 315,453 317,495 315,046 
Net income (loss) per share — basic$(0.10)$0.32 $0.27 $0.84 
Net income (loss) per share — diluted$(0.10)$0.31 $0.26 $0.80 
Dilutive securities included stock options, RSUs, PSUs, PSOs and ESPP contributions.
Certain potential common shares were excluded from our calculation of weighted-average common shares outstanding - diluted because either they would have had an anti-dilutive effect on net income per share or they were related to shares from PSUs for which the addition of a new indication in first-line treatment of advanced RCC in adults. Payment for the first milestone of $20.0 million is due in the fourth quarter of 2017 and payment for the second milestone of $25.0 million is due in the first quarter of 2018. Ipsen historically has paid promptly.
contingent vesting condition had not been achieved. The percentage of total revenues recognized by customer that represent 10% or more of total revenues wasweighted-average potential common shares excluded from our calculation were as follows:
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Diplomat Specialty Pharmacy13% 31% 19% 41%
Ipsen33% 6% 18% 8%
Caremark L.L.C.13% 9% 16% 8%
Affiliates of McKesson Corporation10% 6% 12% 5%
Accredo Health, Incorporated9% 9% 11% 7%
Daiichi Sankyo—% 24% —% 13%
All of our long-lived assets are located in the U.S. We have operations solely in the U.S., while some of our collaboration partners have headquarters outside of the U.S. and some of our clinical trials for cabozantinib are also conducted outside of the U.S.
The following table shows the revenues earned by geographic region. Net product revenues are attributed to regions based on the delivery location. Collaboration revenues are attributed to regions based on the location of our collaboration partner's headquartersfollows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Anti-dilutive securities and contingently issuable shares excluded27,033 6,153 10,224 5,740 
NOTE 10. COMMITMENTS AND CONTINGENCIES
In September 2019, we received a notice letter regarding an Abbreviated New Drug Application (ANDA) submitted to the FDA by MSN Pharmaceuticals, Inc. (MSN), requesting approval to market a generic version of CABOMETYX tablets. MSN’s initial notice letter included a Paragraph IV certification with respect to our U.S. Patent Nos. 8,877,776, 9,724,342, 10,034,873 and 10,039,757, which are listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, also referred to as the Orange Book. MSN’s initial notice letter did not provide a Paragraph IV certification against U.S. Patent No. 7,579,473, the composition of matter patent, or U.S. Patent No. 8,497,284, a method of use patent. On October 29, 2019, we filed a complaint in the United States District Court for the District of Delaware for patent infringement against MSN asserting U.S. Patent No. 8,877,776 arising from MSN’s ANDA filing with the FDA. On November 20, 2019, MSN filed its response to the complaint, alleging that U.S. Patent No. 8,877,776 is invalid and not infringed. On May 5, 2020, we received notice from MSN that it had amended its ANDA to assert additional Paragraph IV certifications. The ANDA now requests approval to market a generic version of CABOMETYX tablets prior to expiration of the two previously-unasserted CABOMETYX patents: U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284. On May 11, 2020, we
21
Table of Contents
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
U.S.$97,807
 $41,971
 $260,853
 $87,757
Europe50,680
 5,223
 60,704
 11,116
Japan4,023
 15,000
 10,848
 15,000
filed a complaint in the United States District Court for the District of Delaware for patent infringement against MSN asserting U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284 arising from MSN’s amended ANDA filing with the FDA. On May 22, 2020, MSN filed its response to the complaint, alleging that each of U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284 is invalid and not infringed. Neither of our complaints alleges infringement of U.S. Patent Nos. 9,724,342, 10,034,873 and 10,039,757. In our complaints, we are seeking, among other relief, an order that the effective date of any FDA approval of the ANDA would be a date no earlier than the expiration of all of U.S. Patent No. 7,579,473, U.S. Patent No. 8,497,284 and U.S. Patent No. 8,877,776, the latest of which expires on October 8, 2030, and equitable relief enjoining MSN from infringing these patents. These two lawsuits against MSN have been consolidated, and a bench trial has been scheduled for May 2022. The sale of a generic version of CABOMETYX earlier than its patent expiration could significantly decrease our revenues and thereby materially harm our business, financial condition and results of operations. It is not possible at this time to determine the likelihood of an unfavorable outcome or estimate of the amount or range of any potential loss.
We recorded lossesmay also from time to time become a party or subject to various other legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of $0.2 million relatingbusiness. Some of these proceedings have involved, and may involve in the future, claims that are subject to foreign exchange fluctuations for both the nine months ended September 30, 2017substantial uncertainties and 2016.unascertainable damages.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysisThis Quarterly Report on Form 10-Q contains forward-looking statements. These statements are based on Exelixis, Inc.’s (“Exelixis,” “we,” “our”(Exelixis, we, our or “us”)us) current expectations, assumptions, estimates and projections about our business and our industry and involve known and unknown risks, uncertainties and other factors that may cause our company’s or our industry’s results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in, or contemplated by, the forward-looking statements. Words such as “expect,” “potential,” “will,” “goal,” “would,” “intend,” “continues,” “objective,” “anticipate,” “initiate,” “believe,” “could,” “plan,” “trend,” or the negative of such terms or other similar expressions identify forward-looking statements. Our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include those discussed in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as those discussed elsewhere in this report. These and many other factors could affect our future financial and operating results. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.
This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and accompanying notes included in this report and the consolidated financial statements and accompanying notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019 filed with the Securities and Exchange Commission or SEC,(SEC) on February 27, 2017. Operating results are not necessarily indicative of results that may occur in future periods. We undertake no obligation to update any forward-looking statement to reflect events after the date of this report.25, 2020.
Overview
We are aan oncology-focused biotechnology company committedthat strives to accelerate the discovery, development and commercialization of new medicines to improve care and outcomes for people with cancer.difficult-to-treat cancers. Since our foundingwe were founded in 1994, threefour products discovered at Exelixisresulting from our discovery efforts have progressed through clinical development, received regulatory approval and enteredestablished a commercial presence in various geographies around the marketplace.world. Two are derived from cabozantinib, our flagship molecule, an inhibitor of multiple tyrosine kinases including VEGF, MET, AXL, VEGF receptors and RET receptors:RET. Our cabozantinib products are: CABOMETYX® (cabozantinib) tablets approved for previously treated advanced renal cell carcinoma or RCC,(RCC) and previously treated hepatocellular carcinoma (HCC); and COMETRIQ® (cabozantinib) capsules approved for progressive, metastatic medullary thyroid cancer (MTC). For these types of cancer, cabozantinib has become or MTC.is becoming a standard of care. The third product,other two products resulting from our discovery efforts are: COTELLIC® (cobimetinib) tablets, is a reversible, an inhibitor of MEK, approved as part of multiple combination regimens to treat specific forms of advanced melanoma and marketed under a collaboration with Genentech, Inc. (a member of the Roche Group) (Genentech); and MINNEBRO® (esaxerenone), an oral, non-steroidal, selective blocker of the mineralocorticoid receptor, approved for the treatment of hypertension in Japan and islicensed to Daiichi Sankyo Company, Limited (Daiichi Sankyo).
The U.S. Food and Drug Administration (FDA) first approved CABOMETYX for previously treated patients with advanced RCC in April 2016, and in December 2017 the FDA expanded CABOMETYX’s approval to include previously untreated patients with advanced RCC. Additionally, in January 2019, the FDA approved CABOMETYX for the treatment of patients with HCC who have been previously treated with sorafenib. Most recently on August 24, 2020, we announced a significant milestone for our program combining cabozantinib with immune checkpoint inhibitors (ICIs) with the submission a supplemental New Drug Application (sNDA) for CABOMETYX in combination with Bristol-Myers Squibb Company’s (BMS) Opdivo as parta treatment of patients with advanced RCC to the FDA, and on October 19, 2020, we and BMS announced that
22
Table of Contents
the FDA had accepted our sNDA and BMS’ supplemental Biologics License Application (sBLA), granted Priority Review to both applications and assigned a combination regimen to treat advanced melanoma. Both cabozantinibPrescription Drug User Fee Act (PDUFA) goal date, or target action date, of February 20, 2021.
To develop and cobimetinib have shown potential in a variety of forms of cancer and are the subject of broad clinical development programs for multiple oncology indications.
While our commercialization efforts forcommercialize CABOMETYX and COMETRIQ are focused inoutside the United States, or U.S., we have licensed development and commercialization rights to cabozantinib outside of the U.S. toentered into license agreements with Ipsen Pharma SAS or Ipsen,(Ipsen) and Takeda Pharmaceutical Company Ltd., or Takeda.Limited (Takeda). We granted to Ipsen has been grantedthe rights to develop and commercialize cabozantinib outside of the U.S. and Japan, and to Takeda has been grantedthe rights to develop and commercialize cabozantinib in Japan. Both Ipsen and Takeda also contribute financially and operationally to the further global development and commercialization of cabozantinib in other potential indications, and we are workingcontinue to work closely with them on these activities. Utilizing its regulatory expertise and established international oncology marketing network, Ipsen has continued to execute on its commercialization plans for CABOMETYX, having received regulatory approvals and launched in multiple territories outside of the U.S., including in the European Union (EU) and Canada, as a treatment for advanced RCC and for HCC in adults who have previously been treated with sorafenib. In addition, in September 2020, Ipsen and BMS submitted type II variation applications to the European Medicines Agency (EMA) to approve the combination of CABOMETYX and Opdivo as a treatment for advanced RCC, with the EMA validating the type II variations and beginning its centralized review process, and both Ipsen and BMS plan to submit applications to approve the combination in other territories beyond the EU. With respect to the Japanese market, Takeda has achieved important milestones in 2020, including receipt of Manufacturing and Marketing Approval from the Japanese Ministry of Health, Labour and Welfare (MHLW) and first commercial sales of CABOMETYX as a treatment of patients with curatively unresectable or metastatic RCC. Takeda also submitted an application to the Japanese MHLW for Manufacturing and Marketing Approval of CABOMETYX as a treatment of patients with unresectable HCC who progressed after prior systemic therapy, and most recently in October 2020, Takeda and Ono Pharmaceutical Co., Ltd. (Ono), BMS’ development and commercialization partner in Japan, submitted a supplemental application to the Japanese MHLW for Manufacturing and Marketing Approval of CABOMETYX in combination with Opdivo for the treatment of patients with unresectable, advanced or metastatic RCC.
BeyondIn addition to our currently approvedregulatory and commercialization efforts in the U.S. and the support provided to our collaboration partners for rest-of-world regulatory and commercialization activities, we are also pursuing other indications for RCC and MTC, we are pursuing other indicationscabozantinib that have the potential to expandincrease the number of cancer patients thatwho could benefit from cabozantinib. Most advancedthis medicine. We are evaluating cabozantinib, both as a single agent and in the cabozantinibcombination with other therapies, in a broad development program iscomprising over 100 ongoing or planned clinical trials across multiple indications. We, along with our evaluationcollaboration partners, sponsor some of CABOMETYX as a treatment for patients with previously untreated advanced RCC. On August 15, 2017, we submitted a supplemental New Drug Application, or sNDA, for cabozantinib in this indication to the U.S. Foodtrials, and Drug Administration, or FDA, and on October 16, 2017, we announced thatindependent investigators conduct the FDA had accepted this filing and granted it Priority Review, assigning a Prescription Drug User Fee Act, or PDUFA, action date of February 15, 2018. The data in support of this filing are derived from CABOSUN, a randomized phase 2 trial comparing cabozantinib to sunitinib in the first-line treatment of patients with intermediate- or poor-risk RCC that was conducted by The Alliance for Clinical Trials in Oncology, or The Alliance,remaining trials through our Cooperative Research and Development Agreement or CRADA,(CRADA) with the National Cancer Institute’s Cancer Therapy Evaluation Program (NCI-CTEP) or NCI-CTEP. In May 2016, The Alliance informed usour investigator-sponsored trial program. Informed by the available data from these clinical trials, we continue to advance cabozantinib’s development program with potentially label-enabling trials. One pivotal trial that CABOSUN met its primary endpoint demonstrating a statistically significant and clinically meaningful improvement of progression-free survival, or PFS, compared with sunitinib. The CABOSUN primary efficacy endpoint results were later confirmed by a blinded independent radiology review committee, or IRRC, in June 2017.
Closely behindhas resulted from this effort is COSMIC-311, our FDA filing for first-line RCC is our investigation of CABOMETYX as a treatment for patients with advanced hepatocellular carcinoma, or HCC, who have previously been treated with sorafenib. On October 16, 2017, we announced that, at the time of the second planned interim analysis, the study’s independent data monitoring committee had recommended that CELESTIAL, our company-sponsored, globalongoing phase 3 pivotal trial ofevaluating cabozantinib versus placebo in patients with advanced HCCradioiodine (RAI)-refractory differentiated thyroid cancer (DTC) who have been previously treated with sorafenib, be stopped because it had met its primary endpoint, with cabozantinib providing a statistically significant and clinically meaningful improvement in overall survival, or OS, comparedprogressed after up to placebo. Safety data from the study were consistent with the established profile of cabozantinib. Based on the results of CELESTIAL, wetwo VEGF receptor-targeted therapies. We plan to submitconduct an sNDA to the FDA inanalysis among the first quarter of 2018, for cabozantinib as a second-line treatment for100 patients with advanced HCC. We will discuss the trial results with regulatory authorities and determine next stepsrandomized in COSMIC-311 for the trial, including offering patients currently receiving placeboco-primary endpoint of objective response rate (ORR), and an interim analysis of progression-free survival (PFS) before the opportunity to cross over to cabozantinib.end of 2020.
We believe that the available clinical data demonstrate that cabozantinib has the potential to be a broadly active anti-cancer agent that can make a meaningful difference in the lives of patients. Accordingly, we are engaged in a broad development program composed of over 50 ongoing or planned clinical trials to explore the clinical potential of cabozantinib in additional tumor types. This program includes Exelixis sponsored trials and trials conducted through our CRADA with NCI-CTEP or our investigator sponsored trial program. We are particularly interested in examiningcontinuing to evaluate cabozantinib’s potential in combination with immunotherapiesICIs to determine if suchthese combinations further improve outcomes for patients. Building on preclinical and clinical observations that cabozantinib createsmay promote a more immune-permissive tumor environment potentially resulting in the cooperative activity of cabozantinib in combination with these products, we are evaluating cabozantinib in combination with a variety of immune checkpoint inhibitors in multiple clinical trials. The most advanced of these combination studies includesICIs. CheckMate -9ER, a phase 3 pivotal trial evaluating the combination of cabozantinib and nivolumab compared to sunitinib in previously untreated advanced or metastatic RCC, for which we and our collaboration partner BMS announced positive top-line results in April 2020, is reflective of this strategy. The trial met its primary endpoint of PFS at final analysis, as well as the secondary endpoints of overall survival (OS) at a pre-specified interim analysis and ORR, and showed that the combination of cabozantinib with nivolumab significantly reduced the risk of disease progression or death compared with sunitinib (hazard ratio [HR]=0.51; 95% confidence interval [CI]: 0.41 to 0.64; p<0.0001) and also significantly improved OS, reducing the risk of death by 40% compared with sunitinib (HR=0.60; 98.89% CI: 0.40 to 0.89; p<0.0010), as well as demonstrated a superior ORR of 56% versus 27% for sunitinib. Data from CheckMate -9ER were presented at Presidential Symposium I at the European Society for Medical Oncology (ESMO) Virtual Congress 2020 in September 2020 and served as the basis for the submission of our sNDA to the FDA for CABOMETYX in combination with Opdivo as a treatment of patients with advanced RCC. We have also collaborated with BMS on CheckMate -040, a multi-cohort phase 1/2 trial evaluating cabozantinib with nivolumab (Opdivo®) orin combination with nivolumab and in combination with both nivolumab and ipilimumab (Yervoy®) in first-linepatients with previously treated or previously untreated advanced RCCHCC, for which initial clinically meaningful results were presented at
23
Table of Contents
American Society of Clinical Oncology’s (ASCO’s) Gastrointestinal Cancers Symposium in January 2020, and COSMIC-313, a phase 2 evaluation3 pivotal trial evaluating the triplet combination of cabozantinib, nivolumab and ipilimumab versus the combination of nivolumab and ipilimumab in patients with previously untreated advanced intermediate- or poor-risk RCC. We expect to complete enrollment for COSMIC-313 in early 2021 and to report top-line results of the same combinationsevent-driven analyses from the trial in HCC, each in collaboration with Bristol-Myers Squibb Company, or BMS. As a further part of our clinical collaboration with BMS, we also planthe 2022 time frame.
In an effort to evaluate cabozantinib and nivolumab with or without ipilimumab in various other tumor types, including in bladder cancer. Diversifyingdiversify our exploration of immunotherapy combinations with ICIs, we have also initiated multiple trials evaluating cabozantinib in combination with F. Hoffmann-La Roche Ltd.’s (Roche’s) ICI, atezolizumab, including COSMIC-312, a phase 3 pivotal trial evaluating cabozantinib in combination with atezolizumab versus sorafenib in previously untreated advanced HCC, for which we announced in August 2020 that enrollment was completed, and COSMIC-021, a broad phase 1b dose escalation study evaluating the safety and tolerability of cabozantinib in combination with The Roche Group’s, or Roche’s, atezolizumab (Tecentriq®) in patients with locally advanced or metastatic solid tumors.
Significant progress also continues COSMIC-021 is divided into two parts: a dose-escalation phase, which was completed in 2018; and an expansion phase, which is ongoing. Findings from the dose-escalation stage of COSMIC-021 demonstrated that the combination was well-tolerated and showed encouraging anti-tumor activity in patients with advanced RCC. The expansion phase of COSMIC-021 comprises 24 total cohorts, with 20 cohorts evaluating the combination of cabozantinib and atezolizumab and four cohorts evaluating cabozantinib or atezolizumab as single-agent therapies. Based on continuing encouraging efficacy and safety data certain cohorts have been or may be further expanded, including the cohorts of patients with non-small cell lung cancer (NSCLC) who have been previously treated with an ICI and metastatic castration-resistant prostate cancer (mCRPC) who have been previously treated with enzalutamide and/or abiraterone acetate and experienced radiographic disease progression in soft tissue. We anticipate enrolling up to be made under our December 2006 worldwide collaboration agreement with Genentech, or1,732 patients in the Genentech Collaboration Agreement, with respecttrial in early 2021, although both the timing and final number of patients are subject to the phase 3initiation of additional cohorts or expansion of selected existing cohorts, as well as any further delays resulting from the COVID-19 pandemic. Since its initiation, data from COSMIC-021 have been instrumental in guiding our clinical development programstrategy for our second approved cancer agent, cobimetinib. Genentech is now conductingcabozantinib in combination with ICIs, including supporting the recent initiation of three phase 3 pivotal trials exploringin collaboration with Roche evaluating the combination of cobimetinibcabozantinib with atezolizumab in colorectal carcinoma (IMblaze370)atezolizumab. The first, CONTACT-01, focuses on patients with metastatic NSCLC who have been previously treated with an ICI and BRAF wild type melanoma population (IMspire170),platinum-containing chemotherapy; the second, CONTACT-02, focuses on patients with mCRPC who have been previously treated with one novel hormonal therapy; and the combination of cobimetinibthird, CONTACT-03, focuses on patients with atezolizumab and vemurafenib in BRAF V600 mutant melanoma (IMspire150 TRILOGY). Enrollment for IMblaze370 was completed ininoperable, locally advanced or metastatic RCC who have progressed during or following treatment with an ICI as the first quarter of 2017, and Genentech has announced that top lineimmediate preceding therapy. Encouraging results for the trial are expected during the first half of 2018. Should these trials prove positive, we believe that cobimetinib will have the potential to provide us with a second meaningful source of revenue. With respect to COTELLIC commercialization in the U.S. under the Genentech Collaboration Agreement, we have been fielding 25%from interim analyses of the sales force promoting COTELLICmCRPC and NSCLC cohorts of COSMIC-021 were presented at ASCO’s Genitourinary Cancer Symposium in combination with Zelboraf® as a treatment for patients with BRAF mutation-positive advanced melanoma. However, following a recent commercial review, commencingFebruary 2020 and the 2020 ASCO Virtual Scientific Program in January 2018, weMay 2020, respectively, and Genentech will scale backpositive results from two RCC cohorts of COSMIC-021 were presented at the personal promotion of COTELLICESMO Virtual Congress 2020 in combination with Zelboraf as a treatment for patients with BRAF mutation-positive advanced melanoma inSeptember 2020. Based on regulatory feedback from the U.S. This decision is not indicative of any change in our intention to promote COTELLIC for other therapeutic indications for which it may be approved in the future.
As we continue to maximizeFDA, and if supported by the clinical therapeuticdata, we intend to file with the FDA for accelerated approval in an mCRPC indication as early as 2021.
We also remain committed to building our product pipeline by discovering and commercial potential of cabozantinib and cobimetinib, we remain steadfast in our commitment to discover and developdeveloping new cancer therapies for cancer patients. In this regard, we have resumed internalUsing our in-house drug discovery efforts with the goal of identifying new productexpertise, specifically in medicinal chemistry, tumor biology and pharmacology, we are advancing small molecule drug candidates to advance into clinical trials.toward and through preclinical development. Notably, these efforts are led by some of the same experienced scientists responsible forthat led the discovery ofefforts to discover cabozantinib, cobimetinib and cobimetinib,esaxerenone, which have been approved for commercializationcommercialization. In addition, we have augmented our internal drug discovery activities with multiple partnerships, including several that enable us to discover and advance various biologics, such as bispecific antibodies and antibody-drug conjugates (ADCs), and we continue to engage in business development initiatives aimed at identifying and in-licensing promising, early-stage oncology assets, which we can further develop utilizing our established clinical development infrastructure. In total, we are advancing drug candidates across approximately 20 ongoing discovery programs toward and through preclinical development, with plans for up to four new compounds to reach Investigational New Drug (IND) filing status by the end of the second quarter of 2021.
The first compounds to advance from our recent internal drug discovery efforts include XL092, a next-generation oral tyrosine kinase inhibitor that is currently in a phase 1 clinical trial in patients with advanced solid malignancies for which dose-escalation cohorts evaluating XL092, both as a single agent and in combination with atezolizumab, are currently enrolling. We presented data that support the ongoing clinical development of XL092 at the 32nd EORTC-NCI-AACR (ENA) Symposium in October 2020, and we expect that once recommended doses of both single-agent XL092 and XL092 in combination with atezolizumab are established, the trial will begin to enroll expansion cohorts for patients with clear cell and non-clear cell RCC, hormone-receptor positive breast cancer and mCRPC. In addition, we anticipate filing an IND for XL265, a TAM kinase-focused kinase inhibitor, in the first quarter of 2021.
In furtherance of our business development strategy, in 2019, we entered into collaboration and license agreements with Aurigene Discovery Technologies Limited (Aurigene), which is focused on the discovery and development of novel small molecules as therapies for cancer, and Iconic Therapeutics, Inc. (Iconic), which is focused on the
24
Table of Contents
advancement of a next-generation ADC program targeting tissue factor in solid tumors. In September 2020, we presented preclinical data that support the continued development of ICON-2, Iconic’s ADC comprised of an anti-tissue factor antibody and a proprietary linker-payload developed by Zymeworks Inc., at the World ADC Digital Conference, and in October 2020, we presented preclinical data that support the continued development of AUR102, the lead Aurigene program targeting cyclin-dependent kinase 7 (CDK7), at the 32nd ENA Symposium. Both ICON-2 and AUR102 continue to progress through preclinical development and could result in IND filings in the fourth quarter of 2020. We have also made progress under our other collaborations with Invenra, Inc. (Invenra), which is focused on the discovery and development of multispecific antibodies for the treatment of cancer, and StemSynergy Therapeutics, Inc. (StemSynergy), which is focused on the discovery and development of novel oncology compounds aimed to inhibit tumor growth by targeting Casein Kinase 1 alpha. Most recently, in September 2020, we entered into additional collaboration agreements to develop multiple ADCs with Catalent, Inc.’s wholly owned subsidiaries Redwood Bioscience, Inc., R.P. Scherer Technologies, LLC and Catalent Pharma Solutions, Inc. (individually and collectively referred to as Catalent), and with NBE-Therapeutics AG (NBE). To further enhance our early-stage pipeline, we expect to enter into additional, external collaborative relationships around assets and technologies that complement our internal drug discovery and development efforts.
COVID-19 Update
As of the date of this Quarterly Report, the COVID-19 pandemic continues to have a modest impact on our business operations, in particular on our clinical trial, drug discovery and commercial activities. We have and continue to undertake considerable efforts to mitigate the various problems presented by this crisis, including as described below:
Clinical Trials. To varying degrees and at different rates across our clinical trials being conducted in regions impacted by COVID-19, we have experienced declines in screening and enrollment activity, delays in new site activations, and restrictions on the access to treatment sites that is necessary to monitor clinical study progress and administration. However, beginning with the second quarter of 2020, we experienced an increase in screening and enrollment activity, and overall, we and our collaboration partners, including principal investigators and personnel at clinical trial sites, have been successful in preventing material delays to our ongoing and planned clinical trials. We have done this through ongoing assessment of the pandemic’s impact and, wherever possible, taking proactive steps in compliance with guidance issued by the FDA, EMA and other regulatory authorities,agencies to support the safety of our patients and their access to treatment, as well as other promising Exelixis compoundsto maintain the high quality of our clinical trials. We recognize, however, that we may have to make further operational adjustments to our ongoing and planned clinical trials and that patient enrollment, and new clinical trial site initiations may be further slowed due to the COVID-19 pandemic, especially if it is further prolonged or grows in severity.
Drug Discovery and Preclinical Development. We have partially resumed internal drug discovery in our laboratories following a temporary suspension of these activities while we observed the shelter in place orders issued by the State of California and Alameda County. While this temporary suspension did not result in any significant changes to the timelines for our late-stage discovery work, we did experience modest delays in the advancement of certain of our early-stage programs. We also experienced some modest delays with respect to the portion of drug discovery work outsourced to third-party contractors in regions first impacted by COVID-19. However, those service providers have resumed discovery work and are meeting their contractual obligations in earlier stagesaccordance with planned timelines. Prior to the COVID-19 pandemic, we largely outsourced preclinical development work to third-party contractors, and that work has continued without substantial delay or interference resulting from the COVID-19 pandemic. While we continue to utilize our resources effectively to move new product candidates toward the clinic, we may ultimately be unable to achieve our drug discovery and preclinical development objectives within the previously disclosed timelines due to the COVID-19 pandemic, especially if it is further prolonged or grows in severity.
Commercial Activities. Although our field employees have limited their in-person promotional activities, they remain engaged with healthcare professionals and are available to them as an informational resource. Nevertheless, with healthcare professionals acutely focused on the COVID-19 pandemic and patient access to healthcare professionals limited due to shelter in place orders, we experienced a decrease in prescriptions for CABOMETYX during the second and third quarters of 2020, which we believe was, at least in part, attributable to the COVID-19 pandemic with respect to the second quarter of 2020. We also observed fluctuations in CABOMETYX ordering, and we believe that this effect could continue depending on developments related to the COVID-19 pandemic. Overall, despite the challenges posed by the pandemic, our commercial business has only experienced a modest impact. We believe this is the case largely because of the gravity of the cancer conditions that our products are indicated to treat and the fact that CABOMETYX has been available as an orally administrable cancer treatment in the U.S. since 2016, thereby establishing a safety and efficacy profile that is well known to healthcare
25
Table of Contents
professionals. It remains possible, however, that over a longer period, changes to our standard sales and marketing practices resulting from the COVID-19 pandemic, including the shift from in-person to primarily telephonic and virtual interactions with healthcare professionals, along with obstacles to patient access to healthcare professionals, could diminish sales of our marketed products.
Supply Chain. We have not experienced production delays or seen any significant impact to our clinical or commercial supply chain as a result of the COVID-19 pandemic. In addition, we continue to maintain substantial safety stock inventories for our commercial drug substance and drug products, which should be sufficient to maintain robust long-term supply. We continue to work closely with our third-party contract manufacturers, suppliers, comparator drug sourcing vendors and collaboration partners to safeguard both the timely production and delivery of our products. If the COVID-19 pandemic is further prolonged or becomes more severe, however, we are prepared to modify our manufacturing and supply chain operations as appropriate in response.
General Business Operations. We have taken numerous temporary precautions to help mitigate the risk of transmission of the virus, including reducing the number of our employees working on-site at our Alameda headquarters under enhanced safety and social distancing protocols. Although having most of our employees continue to work remotely has required that we devise new ways of working and collaborating, to date we have not experienced any material reduction in productivity or interruptions in our general business operations. If the COVID-19 pandemic is further prolonged or becomes more severe, however, we may find it more challenging to maintain that level of productivity, to grow the company as we have anticipated, and to execute on our long-term business plans.
The circumstances surrounding the COVID-19 pandemic are volatile and subject to rapid change. Despite our mitigation efforts, we may experience delays or an inability to execute on our clinical and regulatorypreclinical development pursuantplans, reduced revenues or other adverse impacts to our collaborations with Daiichi Sankyo Company, Limited, or Daiichi Sankyo, Merckbusiness, which are described in more detail in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q. We recognize that this pandemic will continue to present unique challenges for us throughout 2020, and BMS.potentially in future years should the adverse effects of the COVID-19 pandemic continue indefinitely.
Third Quarter 20172020 Business Development Updates and Financial Highlights
During the third quarter of 2017,2020, we continued to build infrastructure intendedexecute on our business objectives, generating significant revenues from operations and enabling us to supportcontinue to seek to maximize the clinical and commercial potential of our anticipated growthproducts and evolution beyondexpand our current product pipeline. Significant business development updates and financial highlights for the quarter and subsequent to quarter-end include:
Business Development Updates
•In July 2017, BMS initiated2020, we announced the initiation of CONTACT-03, a global phase 3 pivotal trial CheckMate 9ER, to evaluateevaluating cabozantinib in combination with nivolumabatezolizumab in patients with inoperable, locally advanced or without ipilimumab,metastatic RCC who progressed during or following treatment with an ICI as the immediate preceding therapy. The co-primary endpoints of the trial are PFS per Response Evaluation Criteria in Solid Tumors (RECIST) v. 1.1 as assessed by independent review and OS, and the secondary endpoints include PFS, ORR and duration of response as assessed by the investigators.
•In July 2020, the FDA approved the sBLA submitted by Genentech for atezolizumab plus cobimetinib and vemurafenib for the treatment of BRAF V600 mutation-positive advanced melanoma in previously untreated patients. The approval is based on positive results from IMspire150, a phase 3 pivotal trial that demonstrated that adding atezolizumab to cobimetinib and vemurafenib helped to reduce the risk of disease worsening or death, compared to placebo plus cobimetinib and vemurafenib. This is the second FDA approval for a regimen including cobimetinib, which we discovered and is now being developed by Genentech as part of a worldwide collaboration agreement between the two companies.
•In August 2020, we announced the completion of patient enrollment in COSMIC-312, a global phase 3 pivotal trial evaluating cabozantinib in combination with atezolizumab versus sunitinib insorafenib as a treatment of patients with previously untreated advanced or metastatic RCC.HCC, providing the requisite patient population to conduct the event-driven analyses of the trial’s endpoints. Separately, patient enrollment remains open in China in order to enroll a sufficient number of patients to enable local registration, if supported by the clinical data. The primary endpointco-primary endpoints of the trial are PFS and OS. Based on current event rates, we anticipate announcing top-line results in the first half of 2021.
•In August 2020, we announced the completion of patient enrollment in EXAMINER, the phase 4 trial evaluating the safety and efficacy of the 60 mg tablet formulation of cabozantinib compared with the 140 mg capsule
26
Table of Contents
formulation, which is marketed as COMETRIQ, for the trialtreatment of patients with progressive, metastatic MTC. EXAMINER is PFS.
In July 2017, we entered into an amendment to our collaboration agreement with Genentech in connection with the settlement of our arbitration concerning claims asserted by us against Genentech related to the development, pricing and commercialization of COTELLIC. The amendment resolves our concerns outlined in the arbitration demand and provides for a favorably revised revenue and cost-sharing arrangement, effective as of July 1, 2017, that is applicable to current and potential future commercial uses of COTELLIC.
In August 2017, we completed the submission of an sNDA withpost-marketing requirement from the FDA for cabozantinib as a treatment for patients with previously untreated advanced RCC.
In September 2017, Ipsen received validation fromand the European Medicines Agency, or EMA, for the application for variationCommission. The trial was designed to the CABOMETYX marketing authorization for the addition of a new indication in first-line treatment of advanced RCC in adults.
In September 2017, at the 2017 European Society for Medical Oncology Congress, we announced updated results from CABOSUN, including the IRRC analysis that confirmed the primary efficacy endpoint results of investigator-assessed PFS. Per the IRRC analysis, cabozantinib demonstrated a clinically meaningfulenroll up to 250 patients, and statistically significant 52% reduction in the rate of disease progression or death (HR 0.48, 95% CI 0.31-0.74, two-sided P=0.0008). The median PFS for cabozantinib was 8.6 months versus 5.3 months for sunitinib, corresponding to a 3.3 month (62%) improvement favoring cabozantinib over sunitinib.
In September 2017, we announced that our partner Daiichi Sankyo reported positive top-line results from ESAX-HTN,the trial are anticipated later in 2020.
•In September 2020, we announced a collaboration and license agreement with Catalent to develop multiple ADCs using Catalent’s proprietary SMARTag® site-specific bioconjugation technology.
•In September 2020, we announced a collaboration and license agreement with NBE to discover and develop multiple ADCs for oncology applications by leveraging NBE’s unique expertise and proprietary platforms in ADC discovery, including NBE’s SMAC-Technology™ (a site-specific conjugation technology) and novel payloads.
•In September 2020, we and Iconic announced preclinical data that support the continued development of ICON-2 for the treatment of diverse solid tumors. The data, which demonstrate the superior tolerability and exposure of ICON-2 compared with a monomethyl auristatin E anti-tissue factor ADC, were presented at the World ADC Digital Conference.
•In September 2020, clinical data from CheckMate -9ER, a phase 3 pivotal trial evaluating the combination of esaxerenone,cabozantinib and nivolumab compared to sunitinib in previously untreated advanced or metastatic RCC, were presented as part of Presidential Symposium I at the ESMO Virtual Congress 2020. In addition, clinical data from the clear cell RCC and non-clear cell RCC cohorts of COSMIC-021, a productphase 1b trial of the companies’ prior research collaboration,cabozantinib in combination with atezolizumab in patients with essential hypertension in Japan. Withlocally advanced or metastatic solid tumors, were presented as part of the trial achieving its primary endpoint, Daiichi Sankyo communicated its intention to submitGU Proffered Paper Session and as part of a Japanese regulatory application for esaxerenone for an essential hypertension indication inposter presentation, respectively, at the first quarter of 2018.ESMO Virtual Congress.
•In October 2017,September 2020, we announced that our collaboration partners Ipsen and BMS filedeach submitted and received validation from the EMA for their type II variation applications for the combination of CABOMETYX and Opdivo as a Clinical Trial Authorizationtreatment for advanced RCC.
•In October 2020, we announced data that support the ongoing clinical development of XL092. The data, which suggest XL092 has a desirable therapeutic profile that pairs the potential for significant anti-tumor activity with a much shorter clinical pharmacokinetic half-life than cabozantinib, as well as a potential synergistic effect in Europe for a first-in-human study of a RORγt inverse agonist, which will trigger a $10.0 million milestone payment to uscombination with ICIs, were presented at the 32nd ENA Symposium. Later in the fourth quarter of 2017 under the termsOctober 2020, we announced enrollment of the parties’ worldwide collaboration for compounds targeting retinoic acid-related orphan receptor, a familyfirst patient into the dose-escalation cohort of nuclear hormone receptors implicatedthe combination arm of the phase 1 trial evaluating the safety, tolerability, pharmacokinetics and preliminary anti-tumor activity of XL092 alone and in inflammatory conditions.combination with atezolizumab in patients with advanced solid tumors.
•In October 2017,2020, we and Aurigene announced preclinical data that support the continued development of AUR102. The data, which demonstrate that AUR102 effectively engages CDK7 and inhibits a key mediator of the cell cycle and transcription, were presented at the 32nd ENA Symposium.
•In October 2020, we and BMS announced that the FDA determined thathad accepted our sNDA and BMS’ sBLA, respectively, for cabozantinibCABOMETYX in combination with Opdivo for the treatment of patients with previously untreated advanced RCC, was sufficiently complete to permit a substantive review. The FDA granted Priority Review of the filingto both applications and assigned a PDUFA actiongoal date of February 15, 2018.20, 2021.
•In October 2017, we announced that CELESTIAL met its primary endpoint2020, our collaboration partner Takeda, along with Ono, submitted a supplemental application to the Japanese MHLW for Manufacturing and Marketing Approval of OS,CABOMETYX in combination with cabozantinib providing a statistically significant and clinically meaningful improvement in OS compared to placebo inOpdivo for the treatment of patients with unresectable, advanced HCC. Based on these results, we plan to submit an sNDA to the FDA in the first quarter of 2018.or metastatic RCC.
Financial Highlights
•Net incomeproduct revenues for the third quarter of 2017 was $81.42020 were $168.6 million,, or $0.28 per share, basic and $0.26 per share, diluted, compared to a net loss of $(11.3)$191.8 million, or $(0.04) per share, basic and fully diluted, for the third quarter of 2016.
2019.
•Total revenues for the third quarter of 2017 increased to $152.52020 were $231.1 million,, compared to $62.2$271.7 million for the third quarter of 2016.
2019.
Cost of goods sold for the third quarter of 2017 increased to $4.7 million, compared to $2.5 million for the third quarter of 2016.
•Research and development expenses for the third quarter of 2017 increased to $28.52020 were $176.8 million,, compared to $20.3$97.3 million for the third quarter of 2016.
2019.
•Selling, general and administrative expenses for the third quarter of 2017 increased to $38.12020 were $88.2 million,, compared to $32.5$51.3 million for the third quarter of 2016.
2019.
Total other•Provision for (benefit from) income (expense), nettaxes for the third quarter of 2017 increased to $3.42020 was $(6.0) million,, compared to $(18.5)$25.2 million for the third quarter of 2016.
2019.
•Net loss for the third quarter of 2020 was $(32.0) million, or $(0.10) per share, basic and diluted, compared to net income of $97.5 million, or $0.32 per share, basic and $0.31 per share diluted, for the third quarter of 2019.
•Cash and investments decreased to $422.3 million at were $1.5 billion as of September 30, 2017,2020, compared to $479.6 million at $1.4 billion as of December 31, 2016.2019.
27
Table of Contents
See “Results of Operations” below for a discussion of the detailed components and analysis of the amounts above.
Although we reported net income of $115.7 million for the nine months ended September 30, 2017, we may not be able to maintain or increase profitability on a quarterly or annual basis and we are unable to accurately predict the extent of long-range future profits or losses. We expect to continue to spend significant additional amounts to fund the continued development and commercialization of cabozantinib. In addition, we intend to expand our product pipeline through the measured resumption of drug discovery and the evaluation of in-licensing and acquisition opportunities that align with our oncology drug expertise, which efforts could involve substantial costs. As a result, we are unable to predict the extent of any future profits or losses because we expect to continue to incur substantial operating expenses and, consequently, we will need to generate substantial revenues to maintain or increase profitability.
Challenges and Risks
We anticipate thatIn addition to the challenges and risks imposed by the COVID-19 pandemic and described under “—COVID-19 Update” above, we will also continue to face a number of challenges and risks to our business that may impact our ability to execute on our remaining 2020 business objectives.objectives, and some of these risks to our business have been or may be exacerbated by the COVID-19 pandemic. In particular, we anticipate that for the foreseeable future, we expect our ability to generate meaningful revenuesufficient cash flow to fund our commercialbusiness operations and our development and discovery programs is dependentgrowth will depend upon the successful commercializationcontinued commercial success of CABOMETYX, both alone or in combination with other therapies, as a treatment for the treatment of advanced RCC in territories wherehighly competitive indications for which it is approved, and possibly for other indications for which cabozantinib has been or is currently being evaluated in potentially label-enabling clinical trials, if warranted by the data generated from these trials. However, we cannot be certain that the clinical trials we and our collaboration partners are currently conducting, or may be approved. Theconduct in the future, will demonstrate adequate safety and efficacy in these additional indications to receive regulatory approval in the major commercial potential of CABOMETYX for the treatment of advanced RCC remains subject to a variety of factors, most importantly, CABOMETYX’s perceived benefit/risk profile as compared to the benefit/risk profiles of other treatments available or currently in development for the treatment of advanced RCC. Our ability to generate meaningful product revenue frommarkets where CABOMETYX is also affected by a number of other factors, includingapproved. Even if we and our collaboration partners receive the extentrequired regulatory approvals to whichmarket cabozantinib for additional indications, we and our collaboration partners may not be able to commercialize CABOMETYX effectively and successfully in these additional indications. In addition, CABOMETYX will only continue to be commercially successful if private third-party and government payers continue to provide coverage and reimbursement. However, as is the case for all innovative pharmaceutical therapies, obtaining and maintaining coverage and reimbursement for CABOMETYX is available from government and other third-party payers. Obtaining and maintaining appropriate coverage and reimbursement for CABOMETYX isbecoming increasingly challenging due to, among other things, efforts by payors to contain and slow increases in healthcare costs indifficult, both within the U.S. and worldwide. It is also potentially threatened by increasing interest among policymakers in foreign markets, because of growing concerns over healthcare cost containment and corresponding policy initiatives and activities aimed at limiting access to, and restricting the U.S. with respect to controlling pharmaceutical drug pricing practices. Our ability to fulfill the fullest commercial potentialprices of, cabozantinib also ultimately depends on our ability to expand the compound’s use by generating data in clinical development that will support regulatory approval of cabozantinib in additional indications. Our immediate focus in this regard is the potential regulatory approval of our sNDA for cabozantinib as a treatment for patients with previously untreated advanced RCC based upon data from CABOSUN. Obtaining this approval represents a significant challenge because CABOSUN was not originally designed as a registration enabling trial. However, given the positive nature of CABOSUN results, combined with the confirming analysis of such results by the IRRC, we submitted an sNDA to the FDA on August 15, 2017, which, as we announced on October 16, 2017, was deemed by the FDA as sufficiently complete to permit a substantive review. The FDA granted the file Priority Review and assigned a PDUFA action date of February 15, 2018.pharmaceuticals.
Achievement of our remaining 2020 business objectives and the continued success of CABOMETYX will also depend on our ability to adaptthe success of our development and commercialization strategystrategies to navigate the increasing prevalence of immunotherapy, which is both a competitive threat and a potential opportunity dueincreased competition, including that from, but not limited to, interest in the use of combination therapytherapies that combine an ICI with another targeted agent to treat cancer.
In additionthe longer term, we may eventually face competition from potential manufacturers of generic versions of our marketed products, including the proposed generic version of CABOMETYX tablets that is the subject of an Abbreviated New Drug Application (ANDA) submitted to the FDA by MSN Pharmaceuticals, Inc. (MSN), which if approved, could result in significant decreases in the revenue derived from the U.S. sales of CABOMETYX and thereby materially harm our business and financial condition. Separately, our research and development objectives may be impeded by the challenges we encounter while working towardof scaling our organization to meet the achievementdemands of ourexpanded drug development, unanticipated delays in clinical testing and commercial objectives, we also face significant challenges in ourthe inherent risks and uncertainties associated with internal drug discovery operations, all of which may be increased as a result of the COVID-19 pandemic. In connection with efforts to expand our product pipeline, through the measured resumption of internalwe may be unsuccessful in discovering new drug discovery activities and the evaluation of in-licensing and acquisition opportunities. Internal discovery efforts require substantial technical, financial and human resources and may fail to yield productcandidates or identifying appropriate candidates for clinical development. Furthermore, we continue to operate in an environment with significant market competition for relevant product candidates, and, even if we are able to identify an attractive and available product candidate, we may not be able to in-licensein-licensing or acquire it on acceptable terms that would enable our continued growth as an organization.acquisition.
Some of these challenges and risks are specific to our business, and others are common to companies in the biotechnology, biopharmaceutical and pharmaceutical industryindustries with development and commercial operations. Moreover, as described under “—COVID-19 Update” above, these risks have been or may be exacerbated by the COVID-19 pandemic. For a completemore detailed discussion of challenges and risks we face, including those relating to the COVID-19 pandemic, see “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Fiscal Year Convention
We have adopted a 52- or 53-week fiscal year policy that generally ends on the Friday closest to December 31st. Fiscal year 20172020, which is a 52-week fiscal year, will end on December 29, 2017January 1, 2021 and fiscal year 20162019, which was a 53-week fiscal year, ended on December 30, 2016.January 3, 2020. For convenience, references in this report as of and for the fiscal periodsthree months ended September 29, 2017October 2, 2020 and September 30, 2016,27, 2019, and as of and for the fiscal years ending January 1, 2021, and ended December 29, 2017 and December 30, 2016,January 3, 2020, are indicated as being as of and for the periodsthree months ended September 30, 20172020 and September 30, 2016,2019 and the years ending December 31, 2020 and ended December 31, 2017 and December 31, 2016,2019, respectively.

28
Table of Contents
Results of Operations
Revenues
Revenues by category were as follows (dollars in thousands):
 Three Months Ended September 30,Percent ChangeNine Months Ended September 30,Percent Change
 2020201920202019
Net product revenues$168,587 $191,768 (12 %)$541,197 $565,024 (4 %)
License revenues33,205 69,137 (52 %)113,318 132,443 (14 %)
Collaboration services revenues29,300 10,798 171 %62,971 29,998 110 %
Total revenues$231,092 $271,703 (15 %)$717,486 $727,465 (1 %)
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Product revenues:       
Gross product revenues$111,148
 $46,720
 $289,365
 $92,383
Discounts and allowances(14,732) (3,978) (36,068) (8,924)
Net product revenues96,416
 42,742
 253,297
 83,459
Collaboration revenues:       
Contract revenues (1)
45,000
 15,000
 47,500
 20,000
License revenues (2)
7,572
 3,780
 21,335
 8,570
Development cost reimbursements2,316
 —
 5,623
 —
Royalty and product supply revenues, net1,206
 672
 4,650
 1,844
Total collaboration revenues56,094
 19,452
 79,108
 30,414
Total revenues$152,510
 $62,194
 $332,405
 $113,873
Dollar change$90,316
   $218,532
 

Percentage change145%   192% 

Net Product Revenues
____________________Gross product revenues, discounts and allowances, and net product revenues were as follows (dollars in thousands):
(1)Includes milestone payments.
(2)Includes amortization of upfront payments.
 Three Months Ended September 30,Percent ChangeNine Months Ended September 30,Percent Change
 2020201920202019
Gross product revenues$220,401 $239,916 (8 %)$702,865 $704,084 0 %
Discounts and allowances(51,814)(48,148)8 %(161,668)(139,060)16 %
Net product revenues$168,587 $191,768 (12 %)$541,197 $565,024 (4 %)
Net product revenues by product were as follows (dollars in thousands):
 Three Months Ended September 30,Percent ChangeNine Months Ended September 30,Percent Change
 2020201920202019
CABOMETYX$159,555 $187,410 (15 %)$522,381 $552,315 (5 %)
COMETRIQ9,032 4,358 107 %18,816 12,709 48 %
Net product revenues$168,587 $191,768 (12 %)$541,197 $565,024 (4 %)
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
CABOMETYX$90,362
 $31,238
 $233,582
 $48,812
COMETRIQ6,054
 11,504
 19,715
 34,647
Net product revenues$96,416
 $42,742
 $253,297

$83,459
Dollar change$53,674
   $169,838
  
Percentage change126%   203%  
For the three and nine months ended September 30, 2017, net product revenues increased 126% and 203%, respectively, as compared to the comparable periodsThe decreases in 2016. For the three and nine months ended September 30, 2017, the 189% and 379% increase in net product revenues for CABOMETYX as compared to the comparable period in 2016, was primarily due to a 174% and 353% increase, respectively, in the number of CABOMETYX units sold as well as an increase in the average selling price of the product. CABOMETYX was approved by the FDA on April 25, 2016 as a treatment for patients with advanced RCC who have received prior anti-angiogenic therapy. The increase in CABOMETYX sales volume was due to an increase in market share. For the three and nine months ended September 30, 2017, the 47% and 43% decrease in net product revenues for COMETRIQ as compared to the comparable periods in 2016, was primarily due to a 77% and 65% decrease, respectively, in the number of COMETRIQ units sold; the decrease in units sold was partially offset by an increase in the average selling price of the product. The decrease in COMETRIQ sales volume was primarily driven by the adoption of CABOMETYX by our customers.
Contract revenues for the three and nine months ended September 30, 2017 reflects recognition of two milestones totaling $45.0 million resulting from Ipsen’s receipt of the validation from the EMA for the application for variation2020, as compared to the CABOMETYX marketing authorization for the addition ofcomparable periods in 2019, were due to a new indicationdecrease in first-line treatment of advanced RCCsales volumes driven by decreases in adults. Payment of the first milestone of $20.0 million is dueprescriptions and lower customer inventory. The increases in the fourth quarter of 2017 and payment of the second milestone of $25.0 million is due in the first quarter of 2018. Contractproduct revenues for the nine months ended September 30, 2017 also reflects recognition of a $2.5 million milestone earned from BMS related to the RORγ program. Contract revenuesCOMETRIQ for the three and nine months ended September 30, 2016 reflect recognition of $15.0 million from a milestone payment earned in

September 2016 from Daiichi Sankyo related to its worldwide license of our compounds that modulate mineralocorticoid receptor, or MR, including CS-3150 (an isomer of XL550). Contract revenues for the nine months ended September 30, 2016 also reflects recognition of a $5.0 million from a milestone payment earned from Merck related to its worldwide license of our phosphoinositide-3 kinase-delta program.
License revenues consists of the recognition of the upfront payments and non-substantive milestone received in connection with our February 2016 collaboration agreement with Ipsen, or the Ipsen Collaboration Agreement, and the upfront payment received in connection with our January 2017 collaboration agreement with Takeda, or the Takeda Collaboration Agreement. For the three and nine months ended September 30, 2017, we recognized $4.7 million and $13.8 million, respectively, of such revenue in connection with the Ipsen Collaboration Agreement,2020, as compared to $3.8 million and $8.6 million, respectively, during the comparable periods in 2016. For the three and nine months ended September 30, 2017, we recognized $2.8 million and $7.5 million, respectively, of such revenue in connection with the Takeda Collaboration Agreement. No such revenue was recognized for Takeda during the comparable periods in 2016. The increase in such revenues is2019, were due to increases in the timingnumber of units of COMETRIQ sold, due to a comparator purchase of the execution of those agreements.product for use in a clinical trial.
Development cost reimbursements for the three and nine months ended September 30, 2017 consisted of reimbursements pursuantWe expect our net product revenues to our collaboration and license agreements, including $1.1 million and $2.3 million, respectively, under the Ipsen Collaboration Agreement and $1.2 million and $3.3 million, respectively, under the Takeda Collaboration Agreement. There were no such development cost reimbursements during the comparable periodsmodestly decrease in 2016.
Royalty and product supply revenues, net, primarily consisted of royalties on ex-U.S. net sales of COTELLIC under our collaboration agreement with Genentech for cobimetinib.
Total revenues by significant customer were2020, as follows (in thousands): 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Diplomat Specialty Pharmacy$20,460
 $19,392
 $62,909
 $46,770
Ipsen50,680
 3,873
 60,704
2,000
8,663
Caremark L.L.C.20,272
 5,591
 52,526
 8,728
Affiliates of McKesson Corporation14,575
 3,683
 38,699
 5,764
Accredo Health, Incorporated13,445
 5,880
 36,504
 8,340
Daiichi Sankyo—
 15,000
 —
 15,000
Others, individually less than 10% of total revenues for all periods presented33,078
 8,775
 81,063
 20,608
Total revenues$152,510
 $62,194
 $332,405
 $113,873
compared to fiscal 2019.
We recognize product revenuerevenues net of discounts and allowances that are further described in “Note 1. Organization and Summary of Significant Accounting Policies” to our “Notes to Consolidated Financial Statements” containedincluded in Part II, Item 8 of our Annual Report on Form 10-K filed withfor the SEC on February 27, 2017. The activities and ending reserve balances for each significant category of discount and allowance were as follows (in thousands):
 Chargebacks and discounts for prompt payment Other customer credits and co-pay assistance Rebates Returns Total
Balance at December 31, 2016$1,802
 $794
 $2,627
 $351
 $5,574
Provision related to sales made in:        
Current period22,823
 5,135
 8,389
 —
 36,347
Prior periods(864) —
 584
 —
 (280)
Payments and customer credits issued(22,221) (4,501) (7,533) (351) (34,606)
Balance at September 30, 2017$1,540
 $1,428
 $4,067
 $—
 $7,035
Chargebacks and discounts for prompt payment are recorded as a reduction of trade receivables and the remaining reserve balances are classified as Other current liabilities in the accompanying Condensed Consolidated Balance Sheets. Balances as ofyear ended December 31, 2016 have been reclassified to reflect that presentation.

2019. The 8% increase in discounts and allowances for the reserve balance atthree months ended September 30, 20172020, as compared to the comparable period in 2019, was primarily the result of an increase in product sales volumethe dollar amount of chargebacks related to Public Health Service hospitals, and to a shiftlesser extent, an increase in payer mix to government programs, which was offset by payments, the issuance of customer creditsMedicaid utilization and the priordollar amount of the related Medicaid rebates. The 16% increase in discounts and allowances for the nine months ended September 30, 2020, as compared to the comparable period adjustments for chargebacksin 2019, was primarily the result of an increase in Public Health Service hospital utilization and certain rebates. the dollar amount of the related chargebacks.
We expect our discounts and allowances as a percentage of gross product revenuerevenues to increase during the remainder of 20172020.
License Revenues
License revenues include the recognition of the portion of milestone payments allocated to the transfer of intellectual property licenses for which it had become probable in the related period that the milestone would be achieved
29
Table of Contents
and a significant reversal of revenues would not occur, as our business evolveswell as royalty revenues and the numberprofit on the U.S. commercialization of COTELLIC from Genentech.
Milestone revenues, which are allocated between license revenues and collaboration services revenues, were $13.5 million and $57.1 million for the three and nine months ended September 30, 2020, respectively, as compared to $50.6 million and $81.1 million for the comparable periods in 2019. Milestone revenues by period included the following:
•Milestone revenues for the three and nine months ended September 30, 2020 included $9.2 million in revenues recognized in connection with a $10.0 million milestone we expect to achieve upon Takeda’s and Ono’s submission of a supplemental application to the Japanese MHLW for Manufacturing and Marketing Approval of CABOMETYX in combination with Opdivo for the treatment of patients participatingwith unresectable, advanced or metastatic RCC.
•Milestone revenues for the nine months ended September 30, 2020 included $25.3 million in government programsrevenues recognized in connection with $31.0 million in milestones we achieved upon Takeda’s first commercial sale of CABOMETYX for the treatment of patients with curatively unresectable or metastatic RCC in Japan and $18.9 million in revenues recognized in connection with a $20.0 million development milestone from Ipsen we determined was probable of achievement. The milestone was achieved on October 1, 2020.
•Milestone revenues for the three and nine months ended September 30, 2019 included recognition of a $50.0 million commercial milestone from Ipsen that we earned in the third quarter of 2019 upon Ipsen’s achievement of $250.0 million in net sales of cabozantinib in its territories over four consecutive quarters.
•Milestone revenues for the nine months ended September 30, 2019 also included recognition of a $20.0 million milestone from Daiichi Sankyo Company, Limited (Daiichi Sankyo) for the launch of MINNEBRO tablets for the treatment of patients with hypertension in Japan and $9.7 million in revenues recognized in connection with a $16.0 million milestone from Takeda for the submission in April 2019 of a regulatory application for cabozantinib for the treatment of patients with advanced RCC to the Japanese MHLW.
Due to uncertainties surrounding the timing and achievement of regulatory and development milestones, it is difficult to predict future milestone revenues and milestones can vary significantly from period to period.
Royalties increased primarily as a result of increases in royalties earned on Ipsen’s net sales of cabozantinib outside of the discountsU.S. and Japan. Ipsen royalties were $19.9 million and $54.1 million for the three and nine months ended September 30, 2020, respectively, compared to $16.4 million and $45.3 million for the comparable periods in 2019. Ipsen’s net sales of cabozantinib have continued to grow since their first commercial sale of the product in the fourth quarter of 2016, primarily due to increased demand of CABOMETYX, which, as of September 30, 2020, is approved in 55 countries outside of the U.S. Royalties also increased due to the commercial launch of CABOMETYX for the treatment of patients with curatively unresectable or rebatesmetastatic RCC in Japan by Takeda during the second quarter of 2020.
Our share of profits on the U.S. commercialization of COTELLIC under our collaboration agreement with Genentech was $1.6 million and $4.4 million for the three and nine months ended September 30, 2020, respectively, as compared to government payers increase,$1.1 million and $3.5 million for the comparable periods in 2019. We also earned royalties on ex-U.S. net sales of COTELLIC by Genentech of $1.4 million and $3.8 million for the three and nine months ended September 30, 2020, compared to $1.6 million and $4.4 million for the comparable periods in 2019.
We expect our license revenues to modestly decrease in 2020, as compared to fiscal 2019, as a result of a decrease in milestones expected to be achieved during the year.
Collaboration Services Revenues
Collaboration services revenues include the recognition of deferred revenue for the portion of upfront and milestone payments that have been allocated to research and development services performance obligations, development cost reimbursements earned under our collaboration agreements, product supply revenues, net of product supply costs, and the engagementroyalties we paid to GlaxoSmithKline (GSK) on sales by Ipsen of products containing cabozantinib.
Development cost reimbursements were $26.3 million and $60.3 million for the three and nine months ended September 30, 2020, respectively, as compared to $12.0 million and $32.5 million for the comparable periods in commercial contracting which may2019. The increases in development cost reimbursements were primarily a result of the reimbursements from Ipsen and Takeda associated with their decision to opt in and co-fund CONTACT-02 and additional discounts or rebates.cohorts of COSMIC-021 studies in 2020 and their respective share of the increase in spending on the COSMIC-312, COSMIC-021 and CONTACT-02 studies.
30
Table of Contents
Collaboration services revenues were reduced by $2.9 million and $7.6 million for the 3% royalty we are required to pay GSK on the net sales by Ipsen and Takeda of any product incorporating cabozantinib for the three and nine months ended September 30, 2020, respectively, compared to $2.2 million and $6.2 million for the comparable periods in 2019. As royalty generating sales of cabozantinib by Ipsen have increased as described above, our royalty payments to GSK have also increased.
We expect collaboration services revenues to increase in 2020, as compared to fiscal 2019, as a result of higher development cost reimbursements earned under our collaboration agreements.
Cost of Goods Sold
The cost of goods sold and our gross marginsmargin were as follows (dollars in thousands):
Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30,Percent ChangeNine Months Ended September 30,Percent Change
2017 2016 2017 2016 2020201920202019
Cost of goods sold$4,658
 $2,455
 $10,875
 $4,700
Cost of goods sold$8,725 $7,537 16 %$27,235 $22,577 21 %
Gross margin95% 94% 96% 94%Gross margin95 %96 %95 %96 %
Cost of goods sold is related to our product revenues and consists primarily of a 3% royalty payable to GlaxoSmithKlineGSK on U.S. net sales of any product incorporating cabozantinib, indirect labor costs,as well as the cost of manufacturing,inventory sold, indirect labor costs, write-downs related to expiring and excess inventory, and other third partythird-party logistics costs. Portions of the manufacturing costs for inventory were incurred prior to the regulatory approval of CABOMETYX and COMETRIQ and, therefore, were expensed as research and development costs when incurred, rather than capitalized as inventory. The sale of products containing previously expensed materials resultedincreases in a 1% and 6% reduction in the Costcost of goods sold during the three and nine months ended September 30, 2017, respectively, as compared to a 6% and 5% reduction during the comparable periods in 2016. As of September 30, 2017 and December 31, 2016, our inventory includes approximately $0.5 million and $1.2 million, respectively, of materials that were previously expensed, are not capitalized, and will not be charged to Costs of goods sold in future periods. Write-downs related to excess and expiring inventory were $1.1 million for the three and nine months ended September 30, 2017 as compared to $0.4 million for the comparable periods in 2016.
The increase in Cost of goods sold was primarily related to the growth in sales of CABOMETYX due to an increase in market share.
Gross margin is net product revenues less cost of goods sold, divided by net product revenues. The increase in gross margin for the three and nine months ended September 30, 2017,2020, as compared to the comparable periods in 2016, was related2019, were primarily the result of increases in write-downs of excess and expiring inventory and certain period costs. We do not expect our gross margin to change significantly during the change in product mix as CABOMETYX sales volumes have increased while COMETRIQ volumes have decreased, and CABOMETYX tablets having a lower manufacturing cost than COMETRIQ capsules which have additional packaging requirements and are made in smaller batches due to limited demand.remainder of 2020.
Research and Development Expenses
Total researchResearch and development expenses were as follows (dollars in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Research and development expenses$28,543
 $20,256
 $79,967
 $72,166
Dollar change$8,287
   $7,801
  
Percentage change41%   11%  
 Three Months Ended September 30,Percent ChangeNine Months Ended September 30,Percent Change
 2020201920202019
Research and development expenses$176,762 $97,295 82 %$393,572 $242,516 62 %
Research and development expenses consist primarily of clinical trial costs, personnel expenses, consultinglicense and outside services, an allocation for general corporateother collaboration costs, stock-based compensation, and expenses for temporary personnel.consulting and outside services.
The increaseincreases in research and development expenses for the three and nine months ended September 30, 2017,2020, as compared to the comparable periodperiods in 2016, was2019, were primarily related to increases in personnel expenses, clinical trial costs, licensing and consultingother collaboration costs, stock-based compensation and outside services. The increase in personnel expenses, was $2.5 million forpartially offset by the three months ended September 30, 2017, as compared to the comparable period in 2016, and was primarily a resultimpact of an increase in headcount associated with the re-launch of our internal discovery program and the build-out of our medical affairs organization. The increase in clinicalincreased development cost reimbursements. Clinical trial costs, which includesinclude services performed by third-party contract research organizations and other vendors who support our clinical trials, was $2.5and comparator drug purchases, increased $34.2 million and $93.6 million for the three and nine months ended September 30, 2017, as compared to

the comparable period in 2016. The increase in clinical trial costs was predominantly due to start-up costs associated with CheckMate 9ER and the phase 1b trial of cabozantinib and atezolizumab in locally advanced or metastatic solid tumors; those increases were partially offset by decreases in costs related to METEOR, our completed phase 3 pivotal trial comparing CABOMETYX to everolimus in patients with advanced RCC. The increase in consulting and outside services was $1.1 million for the three months ended September 30, 2017,2020, respectively, as compared to the comparable periodperiods in 2016,2019. The increases in clinical trial costs were primarily due to costs associated with the expanding clinical trial program for cabozantinib, which includes CONTACT-02, COSMIC-313, COSMIC-312, and wasCOSMIC-021. Licensing and other collaboration costs increased $24.9 million and $19.6 million for the three and nine months ended September 30, 2020, respectively, as compared to the comparable periods in 2019, primarily due to increases in support of our medical affairs organization. The increase in researchupfront license fee payments from recent business development activities with two additional collaboration and license agreements focused on the discovery and development expenses also reflects a $1.0of ADCs. Stock-based compensation increased $14.6 million filing feeand $16.4 million for the submission of our sNDAthree and nine months ended September 30, 2020, respectively, as compared to the FDAcomparable periods in August 20172019, primarily due to the determination that a performance target for cabozantinibthe PSUs granted in 2019 became probable of achievement. Personnel expenses increased $7.8 million and $22.6 million for the three and nine months ended September 30, 2020, respectively, as a treatment for patients with previously untreated advanced RCC.compared to the comparable periods in 2019, primarily due to increases in headcount to support our expanding discovery and development efforts.
The increase in researchResearch and development expenses for the three and nine months ended September 30, 2017,2020 were reduced by $6.3 million and $11.3 million, respectively, as compared to the comparable period in 2016, was primarily related to an increase in personnel expenses and consulting and outside services that were partially offset by a decrease in stock-based compensation. The increase in personnel expenses of $6.7 million for the nine months ended September 30, 2017, as compared to the comparable period in 2016, was primarily a result of an increasedevelopment cost reimbursements in headcount associatedconnection with the re-launch of our internal discovery program and the build-out of our medical affairs organization. The increase in consulting and outside services was $1.2 million for the three months ended September 30, 2017, as compared tocollaboration arrangement with Roche; there were no such reimbursements during the comparable periodperiods in 2016, and was primarily in support2019.
31
Table of our medical affairs organization. The increase in research and development expenses also reflects a $1.0 million filing fee for the submission of our sNDA to the FDA. These increases were partially offset by a decrease in stock-based compensation of $3.2 million for the nine months ended September 30, 2017, as compared to the comparable period in 2016, primarily due to the 2016 recognition of stock-based compensation expense pertaining to the performance-based stock-options tied to the acceptance and anticipated approval of our CABOMETYX New Drug Application, or NDA, submission to the FDA and a 2016 bonus to our employees in the form of fully-vested restricted stock units.Contents
We do not track fully-burdened research and development expenses on a project-by-project basis. We group our research and development expenses into three categories: development,1) development; 2) drug discoverydiscovery; and 3) other. Our development group leads the development and implementation of our clinical and regulatory strategies and prioritizes disease indications in which our compounds are being or may be studied in clinical trials. Our drug discovery group utilizes a variety of technologies, including in-licensed technologies, to enable the rapid discovery, optimization and extensive characterization of lead compounds such that we are able to select development candidates with the best potential for further evaluation and advancement into clinical development. Drug discovery expenses relate primarily to personnel expenses, consulting and outside services, and laboratory supplies. The “Other” category includes stock-based compensation and the allocation of general corporate costs to research and development. The expenditures for research
Research and development expenses by category were as follows (in thousands):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Research and development expenses:
Development:
Clinical trial costs$72,232 $38,055 $188,182 $94,612 
Personnel expenses21,388 14,964 62,286 44,077 
Consulting and outside services4,852 4,084 11,907 10,884 
Other development costs5,836 3,754 15,771 11,824 
Total development104,308 60,857 278,146 161,397 
Drug discovery:
License and other collaboration costs45,761 20,910 58,013 38,390 
Other drug discovery (1)
7,703 6,896 20,844 17,870 
Total drug discovery53,464 27,806 78,857 56,260 
Other (2)
18,990 8,632 36,569 24,859 
Total research and development expenses$176,762 $97,295 $393,572 $242,516 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Development:       
Clinical trial costs$9,754
 $7,279
 $27,966
 $27,504
Personnel expenses7,437
 5,661
 21,649
 16,168
Consulting and outside services2,464
 1,938
 6,370
 6,453
Other development costs3,771
 2,228
 10,318
 8,273
Total development23,426
 17,106
 66,303
 58,398
Drug discovery1,743
 213
 3,986
 723
Other3,374
 2,937
 9,678
 13,045
Total$28,543
 $20,256
 $79,967
 $72,166
____________________
(1)    Primarily includes personnel expenses, consulting and outside services and laboratory supplies.
(2)    Includes stock-based compensation, the allocation of general corporate costs to research and development, and development cost reimbursements in connection with our December 2019 collaboration arrangement with Roche.
In addition to reviewing the three categories of research and development expenses described above, we principally consider qualitative factors in making decisions regarding our research and development programs. SuchThese factors include enrollment in clinical trials for our drug candidates, thepreliminary data and final results of and data from clinical trials, the potential indications for our drug candidates, the clinical and commercial potential for our drug candidates, and competitive dynamics. We also make our research and development decisions in the context of our overall business strategy, which includes the pursuit of commercial collaborations with major pharmaceutical and biotechnology companies for the development of our drug candidates.strategy.
We are focusing our development and commercialization efforts primarily on cabozantinib to maximize the therapeutic and commercial potential of this compound and, as a result, we expect that a significant portion of our near-term research and

development expenses to primarilywill relate to the continuing clinical development program of cabozantinib. We expect to continue to incur significant development costs for cabozantinib, in future periods as we evaluate its potential in a broad development program comprising approximately 50which includes over 100 ongoing or planned clinical trials across multiple indications. The most notableNotable company-sponsored studies ofresulting from this program are CELESTIAL, our company-sponsored phase 3 trialinclude: COSMIC-021 and COSMIC-312, for which Roche is providing atezolizumab free of cabozantinib in advanced HCC, our phase 3 study in collaboration withcharge; COSMIC-313, for which BMS evaluating cabozantinib in combination with nivolumab oris providing nivolumab and ipilimumab as comparedfree of charge; CONTACT-02 for which Roche is sharing in the development costs including the provision of atezolizumab free of charge; and COSMIC-311.
We also remain committed to sunitinib in previously untreated patientsbuilding our product pipeline by discovering and developing new therapies for cancer patients. In this regard, we conduct internal drug discovery activities with advanced RCC, and our phase 2 study, in collaboration with BMS, evaluating cabozantinib and nivolumab or nivolumab and ipilimumab in advanced HCC, as well as our phase 1b study, in collaboration with Roche, evaluating cabozantinib in combination with atezolizumab in patients with advanced malignancies.the goal of identifying new product candidates to advance into clinical trials. In addition, post-marketing commitmentswe have augmented our internal drug discovery activities with multiple partnerships, including several that enable us to discover and advance various biologics, such as bispecific antibodies and ADCs, and we continue to engage in connection with the approval of COMETRIQ in progressive, metastatic MTC dictate thatbusiness development initiatives aimed at identifying and in-licensing promising, early-stage oncology assets, which we conduct an additional study in that indication. As a result, wecan further develop utilizing our established clinical development infrastructure.
We expect our research and development expenses to increase in 2020, as we continuecompared to developfiscal 2019, driven by our ongoing clinical evaluation of cabozantinib and our pipeline.business development activities.
The length of time required for clinical development of a particular product candidate and our development costs for that product candidate may be impacted by the scope and timing of enrollment in clinical trials for the product
32
Table of Contents
candidate, our decisions to develop a product candidate for additional indications and whether we pursue development of the product candidate or a particular indication with a collaborator or independently. For example, cabozantinib is being developed in multiple indications, and we do not yet know for how many of those indications we will ultimately pursue regulatory approval for.approval. In this regard, our decisions to pursue regulatory approval of cabozantinib for additional indications depend on several variables outside of our control, including the strength of the data generated in our prior, ongoing and potential future clinical trials. Furthermore, the scope and number of clinical trials required to obtain regulatory approval for each pursued indication is subject to the input of the applicable regulatory authorities, and we have not yet sought such input for all potential indications that we may elect to pursue, and evenpursue. Even after having given such input, applicable regulatory authorities may subsequently require additional clinical studies prior to granting regulatory approval based on new data generated by us or other companies, or for other reasons outside of our control. As a condition to any regulatory approval, we may also be subject to post-marketing development commitments, including additional clinical trial requirements. As a result of the uncertainties discussed above, we are unable to determine the duration of, or completetotal costs associated with the development of cabozantinib or any of our other research and development projects.
In any event, ourOur potential therapeutic products are subject to a lengthy and uncertain regulatory process that may not result in our receipt of the necessary regulatory approvals. Failure to receive the necessary regulatory approvals would prevent us from commercializing the product candidates affected, including cabozantinib in any additional indications. In addition, clinical trials of our potential product candidates may fail to demonstrate safety and efficacy, which could prevent or significantly delay regulatory approval. A discussion of the risks and uncertainties with respect to our research and development activities, including completing the development of our product candidates, and the consequences to our business, financial position and growth prospects can be found in “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Selling, General and Administrative Expenses
Total selling,Selling, general and administrative expenses were as follows (dollars in thousands):
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Selling, general and administrative expenses$38,129
 $32,463
 $113,116
 $103,143
Dollar change$5,666
   $9,973
  
Percentage change17%   10%  
Three Months Ended September 30,Percent ChangeNine Months Ended September 30,Percent Change
2020201920202019
Selling, general and administrative expenses$88,185 $51,265 72 %$210,916 $170,218 24 %
Selling, general and administrative expenses consist primarily of personnel expenses, consulting and outside services, stock-based compensation, marketing legal and accounting costs, facility costs, and travel and entertainment.certain other administrative costs.
The increaseincreases in selling, general and administrative expenses for the three and nine months ended September 30, 2017,2020, as compared to the comparable periods in 2016, was2019, were primarily related to the increases in stock-based compensation and personnel expenses, consulting and outside services, andexpenses; the increase for the ninethree months ended September 30, 2017, legal and accounting costs; those increases were partially offset by a decrease2020 was also related to an increase in marketing costs. Personnel expenses
Stock-based compensation increased by $2.0$27.9 million and $11.8$28.7 million for the three and nine months ended September 30, 2017,2020, respectively, as compared to the comparable periods in 2016,2019, primarily due to an increasethe determination that a performance target for the PSUs granted in general and administrative headcount to support our commercial and research and development organizations, incentive compensation and the accrual for bonuses. Consulting and outside services2019 became probable of achievement. Personnel expenses increased by $4.3

$3.2 million and $6.0$10.3 million for the three and nine months ended September 30, 2017,2020, respectively, as compared to the comparable periods in 2016,2019, primarily due to increases in consulting for marketing activities. Legaladministrative headcount to support our commercial and accounting expensesresearch development organizations. Marketing costs increased by $3.8$3.9 million for the ninethree months ended September 30, 20172020, as compared to the comparable period in 2016, primarily due2019, in preparation for the launch of CABOMETYX in combination with Opdivo for the treatment of patients with advanced RCC.
We expect our selling, general and administrative expenses to increasesincrease in costs related2020, as compared to fiscal 2019, driven by our dispute with Genentech. Marketing costs decreased by $3.3 millioncontinued commercial investment in CABOMETYX, the growth of the broader organization and $14.6 millionhigher stock-based compensation expense.
33
Table of Contents
Non-operating Income
Non-operating income were as follows (dollars in thousands):
Three Months Ended September 30,Percent ChangeNine Months Ended September 30,Percent Change
2020201920202019
Interest income$3,994 $7,191 (44 %)$16,376 $20,253 (19 %)
Other income (expense), net565 (140)(504 %)571 688 (17 %)
Non-operating income$4,559 $7,051 (35 %)$16,947 $20,941 (19 %)
The decreases in non-operating income for the three and nine months ended September 30, 2017, respectively,2020, as compared to the comparable periods in 2016,2019, were primarily the result of the decreases in interest income due to a decrease in losses recognized under our collaboration agreement with Genentech driven by Genentech’s change in cost allocation approach in December 2016.lower interest rates.
OtherProvision for (Benefit from) Income (Expense), NetTaxes
OtherThe provision for (benefit from) income (expense), net, wastaxes and effective income tax rates were as follows (dollars in thousands):
Three Months Ended September 30,Percent ChangeNine Months Ended September 30,Percent Change
2020201920202019
Provision for (benefit from) income taxes$(5,981)$25,205 (124 %)$19,317 $60,826 (68 %)
Effective income tax rate15.7 %20.5 %18.8 %19.4 %
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Interest income and other, net$3,408
 $3,059
 $6,098
 $4,010
Interest expense—
 (7,834) (8,679) (28,575)
Loss on extinguishment of debt—
 (13,773) (6,239) (13,773)
Total other income (expense), net$3,408
 $(18,548) $(8,820) $(38,338)
Dollar change$21,956
   $29,518
  
Percentage change(118)%   (77)%  
Interest expense decreased by $7.8 million and $19.9 millionWe recorded an income tax benefit for the three months ended September 30, 2020 as a result of a current period pre-tax loss, as compared to the comparable period in 2019 in which we reported pre-tax income. The decrease in provision for income taxes for the nine months ended September 30, 2020 as compared to the comparable period in 2019, was due the decrease in pre-tax income during the period. The effective tax rate for the three and nine months ended September 30, 2017, respectively, as compared to2020 differed from the comparable periods in 2016,U.S. federal statutory rate of 21% primarily due to conversionsexcess tax benefits related to the exercise of certain stock options and the redemption of the 4.25% convertible senior subordinated notes due 2019, or the 2019 Notes,federal tax credits, offset by non-deductible executive compensation during the third and fourth quarters of 2016, the repayment of the Silicon Valley Bank term loan in March 2017 and the repayment of the Secured Convertible Notes due 2018, or the Deerfield Notes, in June 2017.
During the nine months ended September 30, 2017, we recognized a $6.2 million loss on extinguishment of debt resulting primarily from the prepayment penalty associated with the early the repayment of the Deerfield Notes. During the three and nine months ended September 30, 2016, we recognized a $13.8 million loss on extinguishment of debt associated with the conversion of $285.3 million in aggregate principal amount of the 2019 Notes for 53,704,911 shares of our Common Stock. See “Note 6 - Debt” in our “Notes to Condensed Consolidated Financial Statements” for more information on the repayment of our debt during 2017.
periods. The increase in interest income and other, net for the three and nine months ended September 30, 2017, as compared to the comparable periods in 2016, was primarily related to increases in interest income. Interest income increased by $0.4 million and $1.8 millioneffective tax rate for the three and nine months ended September 30, 2017, respectively, as compared to2019 differed from the comparable periods in 2016,U.S. federal statutory rate of 21% primarily due to both an increase in our investment balances and an increase in the yield earned on those investments. Interest income and other, net also included the recognition of a $2.3 million and $3.0 million gain during the three and nine months ended September 30, 2017, respectively,excess tax benefits related to the saleexercise of our 9% interest in Akarna Therapeutics, Ltd. to Allergan Holdco UK Limited in August 2016. We acquired our interest in Akarna in 2015, in exchange for intellectual property rights related tocertain stock options and federal tax credits during the Exelixis discovered compound XL335.periods.
Income Tax Expense
Income tax expense was as follows (in thousands): 
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Income tax expense$3,206
 $—
 $3,921
 $—
Income tax expense for the three and nine months ended September 30, 2017 primarily relates to state taxes in jurisdictions outside of California, for which we do not have net operating loss carry-forwards due to a limited operating history. Our historical losses are sufficient to fully offset any federal taxable income.

Liquidity and Capital Resources
We have incurred net losses in every fiscal year since our inception, with the exception of the 2011 fiscal year, and as of September 30, 2017, we had an accumulated deficit of $1.9 billion. Although we reported net income of $115.7 million for the nine months ended September 30, 2017, we may not be able to maintain or increase profitability on a quarterly or annual basis and we are unable to accurately predict the extent of long-range future profits or losses. We expect to continue to spend significant additional amounts to fund the continued development and commercialization of cabozantinib. In addition, we intend to expand our product pipeline through the measured resumption of drug discovery and the evaluation of in-licensing and acquisition opportunities that align with our oncology drug expertise, which efforts could involve substantial costs. As a result, we are unable to predict the extent of any future profits or losses because we expect to continue to incur substantial operating expenses and, consequently, we will need to generate substantial revenues to maintain or increase profitability.
Since the launch of our first commercial product in January 2013, through September 30, 2017, we have generated an aggregate of $463.0 million in net product revenues, including $253.3 million for the nine months ended September 30, 2017. Other than sales of CABOMETYX and COMETRIQ, we have derived substantially all of our revenues since inception from collaborative arrangements, including upfront and milestone payments and research funding we earn from any products developed from the collaborative research. The amount of our net profits or losses will depend, in part, on: the level of sales of CABOMETYX and COMETRIQ in the U.S. (which may be impacted by our ability to obtain FDA approval for cabozantinib for additional indications); achievement of clinical, regulatory and commercial milestones and the amount of royalties, if any, from sales of CABOMETYX and COMETRIQ under the Ipsen Collaboration Agreement; our share of the net profits and losses for the commercialization of COTELLIC in the U.S. under our collaboration with Genentech; the amount of royalties from COTELLIC sales outside the U.S. under our collaboration with Genentech; other license and contract revenues; and the level of our expenses, including commercialization activities for cabozantinib and any pipeline expansion efforts.
As of September 30, 2017,2020, we had $422.3 million$1.5 billion in cash and investments, which included $417.6 million available for operations and $4.7 millioncompared to $1.4 billion as of long-term restricted investments.December 31, 2019. We anticipate that the aggregate of our current cash and cash equivalents, and short-term investments available for operations, product revenues and collaboration revenues will enable us to maintain our operations for a period of at least 12 months following the filing date of this report. The sufficiency
We expect to continue to spend significant amounts to fund the continued development and commercialization of cabozantinib. In addition, we intend to continue to expand our cashproduct pipeline through our internal drug discovery efforts and the execution of strategic transactions that align with our oncology drug expertise. Financing these activities could materially impact our liquidity and capital resources depends on numerous assumptions, including assumptions relatedand may require us to product sales and operating expenses, as well asincur debt or raise additional funds through the other factors set forth in “Risk Factors” under the headings “Risks Related to our Capital Requirements and Financial Results,” in Part II, Item 1Aissuance of this Quarterly Report on Form 10-Q. Our assumptions may prove to be wrong or other factors may adversely affect our business, and as a resultequity. Furthermore, even though we may notbelieve we have the cash resources to fundsufficient funds for our current and future operating plans. This in turn could require us to raise additional funds, whichplans, we may be unablechoose to do, which could have a material adverse effect on our business. We may also choose toincur debt or raise additional funds through the issuance of equity due to market conditions or debtstrategic considerations. The COVID-19 pandemic has caused volatility in the U.S. and global financial markets and a downturn in the U.S. and global economy, which could adversely impact our rates of return for our invested cash resources, the availability and cost of credit, as well as our ability to meetraise additional funds in the capital markets. Among other things, our business objectives.inability to access additional funds could in the future inhibit our ability to engage in larger-scale strategic transactions or investments.
34
Table of Contents
Sources and Uses of Cash
The following table summarizes our cashCash flow activities were as follows (in thousands):
 Nine Months Ended September 30,
 2017 2016
Net cash provided by operating activities:   
Net income (loss)$115,738
 $(105,345)
Adjustments to reconcile net income (loss) to net cash provided by operating activities9,017
 45,945
Changes in operating assets and liabilities(12,497) 184,695
Net cash provided by operating activities112,258
 125,295
Net cash provided by (used in) investing activities54,628
 (155,638)
Net cash used in financing activities(169,215) (72)
Net decrease in cash and cash equivalents(2,329) (30,415)
Cash and cash equivalents at beginning of period151,686
 141,634
Cash and cash equivalents at end of period$149,357
 $111,219

 Nine Months Ended September 30,
 20202019
Net cash provided by operating activities$175,689 $368,935 
Net cash used in investing activities$(101,706)$(457,046)
Net cash (used in) provided by financing activities$(6,438)$15,553 
Operating Activities
Cash flows provided by operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Cash provided by operating activities is derived by adjusting our net income (loss) for: non-cash operating items such as deferred taxes, stock-based compensation, depreciation, and amortization, non-cash interestlease expense and share-based compensation charges; and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in our Condensed Consolidated ResultsStatements of Operations. Our operating activities provided cashIncome (Loss), the most significant of $112.3 million forwhich may include the nine months ended September 30, 2017, as comparedtiming of milestones payments from our collaboration partners.
The most significant factors that contributed to $125.3 million for the same period in 2016. The decrease in cash provided by operating activities was primarily due to the upfront nonrefundable payment of $200.0 million received from Ipsen infor the nine months ended September 30, 20162020, as compared to the comparable period in consideration2019, were an increase in cash paid for the exclusive licenseoperating expenses, a $53.0 million decrease in milestone payments received, and other rights containednet changes in our collaborationoperating assets and license agreement with Ipsen along with increasing operating expenses. That decrease was partially offset by a $169.8 million increase in net product revenues and the upfront nonrefundable payment of $50.0 million received from Takeda in the nine months ended September 30, 2017 in consideration for the exclusive license and other rights contained in the Takeda Collaboration Agreement.liabilities described above.
Investing Activities
Our investing activities provided cash of $54.6 million for the nine months ended September 30, 2017, as compared to $155.6 million of cash used during the same period in 2016.
Cash provided by investing activities for the nine months endedSeptember 30, 2017 was primarily due to cash provided by the maturity of investments of $277.0 million and the sale of investments of $37.3 million, less cash used for investment purchases of $259.2 million.
Cash used byin investing activities for the nine months ended September 30, 2016 was primarily due to2020 consisted of investment purchases of $262.7$867.0 million and purchases of property, equipment and other of $16.1 million, less cash fromprovided by the maturitymaturities and sales of unrestricted and restricted investments of $103.3$781.3 million.
Cash used in investing activities for the nine months ended September 30, 2019 consisted of investment purchases of $887.7 million and property and equipment purchases of $5.6 million, less cash provided by the maturities and sales of investments of $436.2 million.
Financing Activities
Cash used in financing activities was $169.2 million for the nine months ended September 30, 2017, as compared to $0.1 million during the same period in 2016.
Cash used in financing activities for the nine months ended September 30, 2017 was primarily a result2020 consisted of $185.8$26.1 million of withholding taxes paid for all amounts outstanding under the Deerfield Notes and our term loan with Silicon Valley Bank.
Cash used in financing activities for the nine months ended September 30, 2016 was primarily a resultrelated to net share settlements of payments on conversion of convertible notes and employees’ tax withholding paid to taxing authorities from shares withheld on stockequity awards, which was almost completelypartially offset by $19.7 million in proceeds from the issuance of common stock under our equity incentive and stock purchase plans.
Cash provided by financing activities for the nine months ended September 30, 2019 consisted of $19.0 million in proceeds from the issuance of common stock under our equity incentive and stock purchase plans, partially offset by $3.4 million of withholding taxes paid related to net share settlements of equity awards.
Contractual Obligations
As of September 30, 2017, we have contractual obligations in the form of capital and operating leases, purchase obligations and other long-term liabilities.
On June 28, 2017, we repaid all amounts outstanding under the Deerfield Notes. On March 29, 2017, we repaid all amounts outstanding under our term loan with Silicon Valley Bank. See “Note 6 - Debt” in the accompanying Notes to the Condensed Consolidated Financial Statements for more information on the Deerfield Notes and our loan and security agreement with Silicon Valley Bank.
On May 2, 2017, we entered into a Lease Agreement, or the Lease, with Ascentris 105, LLC, or Ascentris, for an aggregate of 110,783 square feet of space in office and research facilities located at 1851, 1801 and 1751 Harbor Bay Parkway, Alameda, California. We are obligated to make lease payments totaling $24.1 million over the Lease term. The Lease further provides that we are obligated to pay to Ascentris certain costs, including taxes and operating expenses. See “Note 12. Commitments” in the accompanying Notes to the Condensed Consolidated Financial Statements for a description of the Lease.
There were no other material changes outside of the ordinary course of business in our contractual obligations as of September 30, 2020 from those as ofdisclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.

2019.
Off-Balance Sheet Arrangements
As of September 30, 2017,2020, we did not have any material off-balance-sheet arrangements, as defined by applicable SEC regulations.
Critical Accounting Policies and Estimates
The preparation of our Condensed Consolidated Financial Statements conforms to accounting principles generally accepted in the U.S. which requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenueequity, revenues and expenses, and related disclosures. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at
35
Table of Contents
the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our Condensed Consolidated Financial Statements. On an ongoing basis, management evaluates its estimates including, but not limited to,to: those related to revenue recognition, including deductions from revenues (suchdetermining the nature and timing of satisfaction of performance obligations and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sales allowances), the period of performance, identification of deliverables and evaluation ofallowances as well as milestones with respect to our collaborations,included in collaboration arrangements; the amounts of revenues and expenses under our profit and loss sharing agreement,agreement; recoverability of inventory,inventory; the amounts of deferred tax assets and liabilities including the related valuation allowance; the accrual for certain accrued liabilities including accrued clinical trial liability,liabilities; and valuations of equity awards used to determine stock-based compensation.compensation, including certain awards with vesting subject to market or performance conditions. We base our estimates on historical experience and on various other market-specific and other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results could differ materially from those estimates.
We believe our critical accounting policies relating to revenue recognition, inventory, clinical trial accruals, inventorystock-based compensation and share based compensationincome taxes reflect the more significant estimates and assumptions used in the preparation of our Condensed Consolidated Financial Statements.
There have been no significant changes in our critical accounting policies and estimates during the nine months endedSeptember 30, 2017,2020, as compared to the critical accounting policies and estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 20162019 filed with the SEC on February 27, 2017.25, 2020.
Recent Accounting Pronouncements
For a description of the expected impact of recent accounting pronouncements, see “Note 1 -1. Organization and Summary of Significant Accounting Policies” in the “Notes to Condensed Consolidated Financial Statements” includedcontained in Part I, Item 1 of this Quarterly Report on Form 10-Q and “Note 1 - Organization and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” included in our Annual Report on Form 10-K filed with the SEC on February 27, 2017.10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risks at as of September 30, 20172020 have not changed significantly from those discusseddescribed in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 27, 2017.2019.
Our exposure to market risk for changes in interest rates relates to our investment portfolio, and for prior periods, our debt. As of September 30, 2017, an increase in the interest rates of one percentage point would have had a net adverse change in the fair value of interest rate sensitive assets and liabilities of $(1.5) million as compared to a net positive change in the fair value of $0.3 million as of December 31, 2016.
In addition, we have exposure to fluctuations in certain foreign currencies in countries in which we conduct clinical trials. As of September 30, 2017, and December 31, 2016, approximately $1.7 million and $2.2 million, respectively, of our accrued clinical trial liability was owed in foreign currencies. An adverse change of one percentage point in the foreign currency exchange rates would not have resulted in a material impact as of either of the dates presented. We recorded losses of $0.2 million relating to foreign exchange fluctuations for both the nine months ended September 30, 2017 and 2016.

Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act) required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act, our Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.
Limitations on the effectiveness of controls. A control system, no matter how well conceivedwell-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Accordingly, our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met and, as set forth above, our principal executive officer and principal financial officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures were effective to provide reasonable assurance that the objectives of our disclosure control system were met.
Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

36
Table of Contents
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In September 2019, we received a notice letter regarding an ANDA submitted to the FDA by MSN, requesting approval to market a generic version of CABOMETYX tablets. MSN’s initial notice letter included a Paragraph IV certification with respect to our U.S. Patent Nos. 8,877,776, 9,724,342, 10,034,873 and 10,039,757, which are listed in the Approved Drug Products with Therapeutic Equivalence Evaluations, also referred to as the Orange Book. MSN’s initial notice letter did not provide a Paragraph IV certification against U.S. Patent No. 7,579,473, the composition of matter patent, or U.S. Patent No. 8,497,284, a method of use patent. On June 3, 2016,October 29, 2019, we filed a Demandcomplaint in the United States District Court for Arbitration before JAMS in San Francisco, Californiathe District of Delaware for patent infringement against MSN asserting claims against Genentech (a memberU.S. Patent No. 8,877,776 arising from MSN’s ANDA filing with the FDA. On November 20, 2019, MSN filed its response to the complaint, alleging that U.S. Patent No. 8,877,776 is invalid and not infringed. On May 5, 2020, we received notice from MSN that it had amended its ANDA to assert additional Paragraph IV certifications. The ANDA now requests approval to market a generic version of CABOMETYX tablets prior to expiration of the Roche Group) related to its clinical development, pricingtwo previously-unasserted CABOMETYX patents: U.S. Patent No. 7,579,473 and commercializationU.S. Patent No. 8,497,284. On May 11, 2020, we filed a complaint in the United States District Court for the District of COTELLIC,Delaware for patent infringement against MSN asserting U.S. Patent No. 7,579,473 and cost and revenue allocationsU.S. Patent No. 8,497,284 arising from COTELLIC’s commercialization inMSN’s amended ANDA filing with the U.S. Our arbitration demand asserted that Genentech breached the parties’ December 2006 collaboration agreement for the development and commercialization of COTELLIC, by, amongst other breaches, failing to meetFDA. On May 22, 2020, MSN filed its diligence and good faith obligations.
On July 13, 2016, Genentech asserted a counterclaim for breach of contract seeking monetary damages and interest relatedresponse to the cost allocations undercomplaint, alleging that each of U.S. Patent No. 7,579,473 and U.S. Patent No. 8,497,284 is invalid and not infringed. Neither of our complaints alleges infringement of U.S. Patent Nos. 9,724,342, 10,034,873 and 10,039,757. In our complaints, we are seeking, among other relief, an order that the collaboration agreement. On December 29, 2016, however, Genentech withdrew its counterclaim against us and stated that it would unilaterally change its approach to the allocationeffective date of promotional expenses arising from commercializationany FDA approval of the COTELLIC plus Zelboraf® combination therapy, both retrospectively and prospectively. The revised allocation approach substantially reduced our exposure to costs associated with promotion ofANDA would be a date no earlier than the COTELLIC plus Zelboraf combination in the U.S.
On June 8, 2017, the parties settled the arbitration, which was dismissed with prejudice. The settlement was memorialized in a settlement agreement dated July 19, 2017, that included a mutual releaseexpiration of all claims arising out of or related in any way toU.S. Patent No. 7,579,473, U.S. Patent No. 8,497,284 and U.S. Patent No. 8,877,776, the causeslatest of actions and/or claims that were asserted or couldwhich expires on October 8, 2030, and equitable relief enjoining MSN from infringing these patents. These two lawsuits against MSN have been asserted based on the facts alleged in the arbitration. The settlement does not provideconsolidated, and a bench trial has been scheduled for payments in settlement of the asserted claims; as part of the settlement, on July 19, 2017, the parties entered into an amendment to the Genentech Collaboration Agreement. Pursuant to the terms of the amendment, we continue to be entitled to a share of U.S. profits and losses received in connection with the commercialization of COTELLIC in accordance with the profit share tiers as originally set forth in the collaboration agreement, which share continues to decrease as sales of COTELLIC increase. However, effective as of July 1, 2017, the revenue for each sale of COTELLIC applied to the profit and loss statement for the collaboration agreement, or the Collaboration P&L, is being calculated using the average of the quarterly net selling prices of COTELLIC and any additional branded Genentech product(s) prescribed with COTELLIC in such sale. While we also continue to share U.S. commercialization costs for COTELLIC, the amendment expressly sets forth that the amount of commercialization costs Genentech is entitled to allocate to the Collaboration P&L is to be reduced based on the number of Genentech products in any given combination including COTELLIC. In addition, the amendment also sets forth the parties’ confirmation and agreement that we have exercised our co-promotion option and that, as such, we have the option to co-promote current and future Genentech combinations that include COTELLIC in the U.S.May 2022.
We may also from time to time become a party or subject to various other legal proceedings arisingand claims, either asserted or unasserted, which arise in the ordinary course of business. Some of these proceedings have involved, and may involve in the future, claims that are subject to substantial uncertainties and unascertainable damages.
Item 1A. Risk Factors
In addition to the factorsrisks discussed elsewhere in this report, and our other reports filed with the SEC, the following are important factors that could cause actual results or events to differ materially from those contained in any forward-looking statements made by us or on our behalf. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we deem immaterial also may impair our business operations. If any of the following risks or such other risks actually occurs,occur, our business could be harmed.
We have marked with an asterisk (*) those risk factors below that reflect substantive changes in risks facing us from the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2016 filed with the Securities and Exchange Commission on February 27, 2017.
Risks Related to Our Business and Industry
Our future prospects areability to grow our company is critically dependent upon the commercial success of CABOMETYX for advanced RCCin its approved indications and the further clinical development, regulatory approval and commercial success of cabozantinib in additional indications.
Our mission is to maximize the clinical and commercial potential of cabozantinib and cobimetinib and position Exelixis for future growth through the resumption of our discovery efforts and expansion of our development pipeline. We anticipate that for the foreseeable future, our ability to generate meaningful revenuemaintain or meaningfully increase cash flow to fund our commercialbusiness operations and our development and discovery programsgrowth will be dependentdepend upon the successful commercializationcontinued commercial success of CABOMETYX, both alone or in combination with other therapies, as a treatment for the treatment of advanced RCC in territories wherehighly competitive indications for which it is approved, and possibly for other indications for which cabozantinib has been or may soon be approved. The commercial potentialis currently being evaluated in potentially label-enabling clinical trials, if warranted by the data generated from these trials. In this regard, part of

CABOMETYX for the treatment of advanced RCC remains subject our strategy is to a variety of factors, most importantly, CABOMETYX’s perceived benefit/risk profile as compared to the benefit/risk profiles of other treatments available or currently in development for the treatment of advanced RCC. If revenue from CABOMETYX decreases, we may need to reduce our operating expenses or raisepursue additional funds to execute our business plan, which would have a material adverse effect on our business and financial condition, results of operations and growth prospects. Furthermore, as a consequence of the Ipsen Collaboration Agreement, we rely heavily upon Ipsen’s regulatory, commercial, medical affairs, and other expertise and resources for commercialization of CABOMETYX in territories outside of the U.S. and Japan. If Ipsen is unable to, or does not invest the resources necessary to successfully commercialize CABOMETYX for the treatment of advanced RCC in the European Union and other international territories where it may be approved, this could reduce the amount of revenue we are due to receive under Ipsen Collaboration Agreement, thus resulting in harm to our business and operations.
We also believe that there are commercial opportunitiesindications for cabozantinib in therapeutic indications beyond advanced RCC, andto increase the number of cancer patients who could benefit from this medicine. However, we are dedicating substantial proprietary resources to developing cabozantinib into a potentially broad and significant oncology franchise. Even following the approval of CABOMETYX for the treatment of advanced RCC in the U.S. and European Union, our success remains contingent upon, among other things, successful clinical development, regulatory approval and market acceptance of cabozantinib in additional indications, such as previously untreated advanced RCC, advanced HCC, non-small cell lung cancer, and other forms of cancer. We cannot be certain that that the clinical trials we and our collaboration partners are currently conducting, or may conduct in the future, will demonstrate adequate safety and efficacy in clinical testingthese additional indications to receive regulatory approval. Shouldapproval in the major commercial markets where CABOMETYX is approved. Even if we prove unsuccessfuland our collaboration partners receive the required regulatory approvals to market cabozantinib for additional indications, we and our collaboration partners may not be able to commercialize CABOMETYX effectively and successfully in advancingthese additional indications. If revenue from CABOMETYX decreases or remains flat, or if we are unable to expand the labeled indications in major commercial markets where CABOMETYX is approved, or if we fail to achieve anticipated product royalties and collaboration milestones, whether as a result of the COVID-19 pandemic or otherwise, we may need to reduce our operating expenses, access other sources of
37
Table of Contents
cash or otherwise modify our business plans, which could have a material adverse impact on our business, financial condition and results of operations.
If the COVID-19 pandemic is further prolonged or becomes more severe, our business operations and corresponding financial results could suffer, which could have a material adverse impact on our financial condition and prospects for growth.
Our business could be materially and adversely impacted by the ongoing COVID-19 pandemic, a disease caused by a novel coronavirus, SARS-CoV-2, which has spread globally. To date, the COVID-19 pandemic has had a modest impact on our business operations, in particular on our clinical trial, drug discovery and commercial activities. For example, to varying degrees and at different rates across our clinical trials being conducted in regions impacted by COVID-19, we experienced declines in screening and enrollment activity, delays in new site activations, and restrictions on access to treatment sites that is necessary to monitor clinical study progress and initiation. However, as the COVID-19 pandemic continues to surge in various parts of the world, the impact on our clinical development operations could grow more severe. We anticipate that a further prolonged, or more severe, global public health crisis could limit our ability to identify and commercializationwork with clinical investigators at clinical trial sites globally to enroll, initiate and maintain treatment per protocol of patients for our ongoing COSMIC-311, COSMIC-312, COSMIC-313, COSMIC-021, CONTACT-01, CONTACT-02 and CONTACT-03 clinical trials. Disruptions to medical and administrative operations at clinical trial sites and the implementation of crisis management initiatives have and may continue to reduce personnel and other resources necessary to conduct our clinical trials, which could delay our clinical trial plans or require certain trials to be temporarily suspended. Moreover, quarantines and travel restrictions have impeded and may continue to impede patient movement or interrupt healthcare services, which we anticipate over time, could also interfere with and potentially negatively impact clinical trial results. In addition, new and increased costs connected with our efforts to mitigate the adverse impacts resulting from the COVID-19 pandemic on our clinical trials could cause the expenses we incur in administering those clinical trials to increase considerably. Specifically, with respect to our clinical trials evaluating cabozantinib in combination with therapies that must be administered via professional intravenous infusion, such as COSMIC-312, COSMIC-313, COSMIC-021, CONTACT-01, CONTACT-02 and CONTACT-03, limited patient movement or interrupted healthcare services at medical institutions have delayed in some instances and may continue to delay or prevent on-site infusion of the therapies being evaluated in combination with cabozantinib. If a sizable portion of patients in our combination studies are unable or unwilling to receive all components of the combination therapy being tested in accordance with the applicable clinical trial protocol, it could cause those studies to be delayed, suspended or prevented from producing statistically significant results.Depending upon the duration and severity of the COVID-19 pandemic, we could also experience delays in the commencement of new clinical trials of cabozantinib, beyond MTC or advanced RCC,our earlier-stage investigative product candidates. The COVID-19 pandemic could also impede internal clinical operations and delay our planning and preparation timelines for new clinical trials, as well as adversely affect our ability to obtain regulatory approval for clinical protocols and increase the operating expenses connected with these new clinical trials.
In addition, the COVID-19 pandemic caused us to suspend internal drug discovery work in our laboratories temporarily while we observed the shelter in place orders issued by the State of California and Alameda County. We also experienced some modest delays with respect to the portion of drug discovery work outsourced to third-party contractors in regions first impacted by COVID-19. While both internal drug discovery work in our laboratories and outsourced drug discovery activities have since partially resumed, we may be unable to executemaximize the potential of these programs due to reduced staffing and the imposition of increased safety protocols, and should the COVID-19 pandemic grow in severity, we may have to further scale back or suspend activities in the future. For example, as a result of spikes or surges in infection, positivity or hospitalization rates, we may choose or be required to suspend work in our laboratories, which will once again impede our internal drug discovery efforts. Prior to the COVID-19 pandemic, we largely outsourced preclinical development work, as well as certain drug discovery activities, to third-party contractors, and although to date that work has continued without substantial delay or interference, the COVID-19 pandemic could impede these third parties from providing timely deliverables to us in the future. As a result, should the COVID-19 pandemic be further prolonged or grow in severity, we may ultimately be unable to achieve our drug discovery and preclinical development objectives within the previously disclosed timelines, which could have a material adverse impact on our prospects for growth.
While we believe that our commercial business has, to date, only experienced a modest impact related to the COVID-19 pandemic, it remains possible that over a longer period, changes to our standard sales and marketing practices, including the shift from in-person to primarily telephonic and virtual interactions with healthcare professionals, could negatively impact the flow of important information regarding our medicines, which along with obstacles to patient access to healthcare professionals, could diminish sales of our marketed products.
38
Table of Contents
Although as of the date of this Quarterly Report, we continue to maintain substantial safety stock inventories for our drug substance and drug products and have not experienced production delays or seen significant impairment to our supply chain as a result of the COVID-19 pandemic, our third-party contract manufacturers and suppliers could experience operational delays due to facility closures and other hardships as a result of the COVID-19 pandemic, which could impact our supply chain by potentially causing delays to or disruptions in the supply of our commercial or clinical products or product candidates. These delays or disruptions could be further exacerbated if the COVID-19 pandemic begins to impact essential distribution systems, which could substantially increase delivery times and costs, or otherwise adversely affect our ability to provide our products to customers and clinical trial sites and generate product revenues.
As of the date of this Quarterly Report, we have taken temporary precautions to help mitigate the risk of transmission of the virus, including: reducing the number of our employees working on-site at our Alameda headquarters under enhanced safety and social distancing protocols; suspending all non-essential business travel for our employees; and limiting the circumstances under which our field employees may engage in in-person promotional activities with healthcare professionals. Over a longer period, all of these measures could negatively affect our business planoperations and prospects in both foreseeable and unforeseeable ways. For instance, requiring employees to work remotely while we adhered to shelter in place orders limited our revenuesinternal drug discovery activities, and financial condition would be materially adversely affected.
Wealthough we have begun to allow our employees to return to our Alameda headquarters under enhanced safety and social distancing protocols, if we are heavily dependentforced to, or determine that we should, resume shelter in place restrictions for an extended period of time, this could eventually cause delays and otherwise negatively impact the effectiveness of these programs and impede our ability to execute on our partner, Genentech (a memberlong-term business plans. Further, extended periods of remote work could impede the Roche group), forfocused attention of management or reduce the successful development, regulatory approvalproductivity of teams that would otherwise be working closely together. The COVID-19 pandemic has also caused volatility in the U.S. and commercialization of cobimetinib.*
The terms of our collaboration agreement provide Genentech with exclusive authority overglobal financial markets and a downturn in the U.S. and global development and commercialization plans for cobimetinib and the execution of those plans. We have limited effective influence over those plans and are heavily dependent on Genentech’s decision making. Any significant changes to Genentech’s business strategy and priorities, overeconomy, which we have no control, could adversely affect Genentech’s willingness orimpact our rates of return for our invested cash resources, the availability and cost of credit, as well as our ability to complete their obligations underraise additional funds in the capital markets. Among other things, our collaboration agreementinability to access additional funds could in the future inhibit our ability to engage in larger scale strategic transactions or investments.
While we expect the COVID-19 pandemic to continue to have varying degrees of adverse impact on our business operations and, resultpotentially in harmthe future, our financial results, the extent of such adverse impact arising from the COVID-19 pandemic to our business and operations. Subjectour financial results, as well as to contractual diligence obligations, Genentech has complete control overthe value of and market for our common stock, will depend on future developments that are highly uncertain and cannot be predicted with confidence at this time, such as the ultimate duration of the pandemic, travel restrictions, quarantines, social distancing and business closure requirements in the U.S. and in other countries, and the effectiveness of actions taken globally to contain and treat the disease. These effects could materially and adversely affect our business, financial condition, results of operations and growth prospects, as further explained in the risks and uncertainties described elsewhere in this ‘‘Risk Factors’’ section. In addition, to the extent the ongoing COVID-19 pandemic adversely impacts our business and financial responsibilityresults, it may also have the effect of exacerbating many of these other risks and uncertainties inherent to our business.
We rely on Ipsen and Takeda for cobimetinib’s development program, regulatorythe commercial success of CABOMETYX in its approved indications outside of the U.S., and commercial strategy and execution, and we are not ableunable to control the amount or timing of resources expended by these collaboration partners in the commercialization of CABOMETYX in its approved indications outside of the U.S.
We rely upon the regulatory, commercial, medical affairs, market access and other expertise and resources of our collaboration partners, Ipsen and Takeda, for commercialization of CABOMETYX in their respective territories outside of the U.S. We cannot control the amount and timing of resources that Genentech will devoteour collaboration partners dedicate to the product. Of particular significance are Genentech’s development efforts with respectcommercialization of CABOMETYX, or to its marketing and distribution, and our ability to generate revenues from the commercialization of CABOMETYX by our collaboration partners depends on their ability to obtain and maintain regulatory approvals for, achieve market acceptance of, and to otherwise effectively market, CABOMETYX in its approved indications in their respective territories. Further, the operations of our collaboration partners, and ultimately their foreign sales of CABOMETYX, could be adversely affected by the degree and effectiveness of their respective corporate responses to the combinationCOVID-19 pandemic, as well as by the imposition of cobimetinib with immuno-oncology agents, a promisinggovernmental price or other controls, political and competitive areaeconomic instability, trade restrictions or barriers and changes in tariffs, escalating global trade and political tensions, or otherwise. If our collaboration partners are unable or unwilling to invest the resources necessary to commercialize CABOMETYX successfully in the EU, Japan and other international territories where it has been approved, this could reduce the amount of clinical research. Regardlessrevenue we are due to receive under these collaboration agreements, thus resulting in harm to our business and operations.
39
Table of Genentech’s efforts and expenditures for the further developmentContents
Our ability to grow revenues from sales of cobimetinib, the results of such additional clinical investigation may not prove positive and may not produce label expansions or approval in additional indications.
The commercial success of cabozantinib, as CABOMETYX tablets for advanced RCC and as COMETRIQ capsules for MTC, and if approved for additional indications, will depend upon the degree of market acceptance among physicians, patients, health carehealthcare payers, and the medical community.
Our ability to successfully commercialize cabozantinib, asincrease or maintain revenues from sales of CABOMETYX tablets for advanced RCC and COMETRIQ capsules for MTCits approved indications is, and if approved for additional indications will be, highly dependent upon the extent to which cabozantinib gainsof market acceptance of CABOMETYX among physicians, patients, health caregovernment healthcare payers such as Medicare and Medicaid, and commercial healthcare plans and the medical community. If cabozantinib does not achieve an adequate level ofMarket acceptance we may not generate significant future product revenues. The degree of market acceptancefor CABOMETYX could depend on numerous factors, including the effectiveness and safety profile, or the perceived effectiveness and safety profile, of CABOMETYX and COMETRIQ will depend upon a number of factors, including:
the effectiveness, or perceived effectiveness, of cabozantinib in comparisoncompared to competing products;
the safety of cabozantinib, including the existence of serious side effects of cabozantinib and their severity in comparison to those of any competing products;
cabozantinib’s relative convenience and ease of administration;
unexpected results connected with analysis of data from future or ongoing clinical trials;
the timing of cabozantinib label expansions for additional indications, if any, relative to competitive treatments;

the price of cabozantinib relative to competitive therapies and any new government initiatives affecting pharmaceutical pricing;
products, the strength of CABOMETYX sales and marketing efforts, marketing, medical affairsthe impact to healthcare systems and distribution support;
the sufficiency of commercial and government insurance coverage and reimbursement; and
our ability to enforcesuccessfully communicate product information to healthcare professionals resulting from the COVID-19 pandemic, and changes in pricing and reimbursement for CABOMETYX. If CABOMETYX does not continue to be prescribed broadly for the treatment of its approved RCC and HCC indications, our intellectual property rightsproduct revenues could flatten or decrease, which could have a material adverse impact on our business, financial condition and results of operations.
Our competitors may develop products and technologies that impair the relative value of our marketed products and any future product candidates.
The biotechnology, biopharmaceutical and pharmaceutical industries are competitive and are characterized by constant technological change and diverse offerings of products, particularly in the area of novel oncology therapies. Many of our competitors have greater capital resources, larger research and development staff and facilities, deeper regulatory expertise and more extensive product manufacturing and commercial capabilities than we do, which may afford them a competitive advantage. Further, our competitors may be more effective at in-licensing and developing new commercial products that could render our products, and those of our collaboration partners, obsolete and noncompetitive. We face, and will continue to face, intense competition from biotechnology, biopharmaceutical and pharmaceutical companies, as well as academic research institutions, clinical reference laboratories and government agencies that are pursuing scientific and clinical research activities similar to ours.
Furthermore, the specific indications for which CABOMETYX is currently or may be approved, based on the results from clinical trials currently evaluating cabozantinib, are highly competitive. Several novel therapies and combinations of therapies have been approved, are in advanced stages of clinical development or are under expedited regulatory review in these indications, and these other therapies are currently competing or are expected to compete with CABOMETYX. We believe our future success will depend upon our ability to maintain a competitive position with respect to cabozantinib.the shifting landscape of therapeutic strategy following the advent of ICIs. While we have adapted our cabozantinib development strategy to address the use of therapies that combine ICIs with other targeted agents in indications for which CABOMETYX is approved, we cannot ensure that our ongoing or planned clinical trials will show efficacy in comparison to competing product combinations. Moreover, the complexities of such a development strategy have required and are likely to continue to require collaboration with some of our competitors.
If we are unable to maintain or scale adequateincrease our internal sales, marketing, market access and product distribution capabilities for our products, we may be unable to maximize product revenues, which could have a material adverse impact on our business, financial condition and results of operations.
Maintaining our sales, marketing, market access and product distribution capabilities requires significant resources, and there are numerous risks involved with maintaining and continuously improving such a commercial organization, including our potential inability to successfully recruit, train, retain and incentivize adequate numbers of qualified and effective sales and marketing personnel. We are competing for talent with numerous commercial- and precommercial-stage, oncology-focused biotechnology companies seeking to build out and maintain their commercial organizations, as well as other large pharmaceutical and biotechnology organizations that have extensive, well-funded and more experienced sales and marketing operations, and we may be unable to maintain or adequately scale our commercial organization as a result of such competition. Also, to the extent that the commercial opportunities for CABOMETYX grow over time, we may not properly scale the size and experience of our commercialization teams to market and sell CABOMETYX successfully in an expanded number of indications. If we are unable to maintain or scale our commercial function appropriately, or should we have to maintain primarily telephonic and virtual interactions in lieu of in-person meetings with healthcare professionals for an extended period of time as a result of the COVID-19 pandemic, we may not be able to maximize product revenues, which could have a material adverse impact on our business, financial condition and results of operations.
40
Table of Contents
If we are unable to enter into or maintain agreements with third parties to do so,store, distribute and commercialize our products, we may be unable to maximize product revenues, andwhich could have a material adverse impact on our business, financial condition and results of operations and prospects may be adversely affected.*operations.
MaintainingOur ability to commercialize our sales, marketing, market access, medical affairs and productproducts successfully will depend, in part, on the adequacy of our distribution capabilities requires significant resources. If we cannot maintain effective sales, marketing, market access, medical affairs and product distribution capabilities, we may be unableof those products to maximize the commercial potential of cabozantinib in its approved indications. Also, to the extent that the commercial opportunities for cabozantinib grow over time, we may not properly judge the requisite size and experience of the commercialization teams or the scale of distribution necessary to market and sell cabozantinib successfully. If we are unable to maintain or scale our organization appropriately, we may not be able to maximize product revenues and our business, financial condition, results of operations and prospects may be adversely affected.
eligible patients. We currently rely on third-party providers to handlefor storage and distribution for our commercial supply of both CABOMETYX and COMETRIQ in the U.S. While we have expanded our U.S. distribution and pharmacy channels in connection with the approval of CABOMETYX by the FDA for the treatment of patients with advanced RCC in the U.S., we still rely on a relatively limited distribution network to dispense COMETRIQ in fulfillment of prescriptions in the U.S. Furthermore, we rely on our collaboration partners for theongoing commercialization and distribution of CABOMETYX and COMETRIQ in their respective territories outside of the U.S., as well as for access and distribution activities for the approved products under the Named Patient Use program or anamed patient use programs (or similar program with the effect of introducing earlier patient access to COMETRIQ and CABOMETYX.programs).
Our current and anticipated future dependence upon the activities, support, and legal and regulatory compliance of third parties may adversely affect our ability to supply cabozantinib to the marketplaceCABOMETYX and COMETRIQ on a timely and competitive basis. TheseThe services provided by these third parties may not provide services inbe effective or timely, which risks may be increased as a result of the time requiredCOVID-19 pandemic. In such cases, we may be unable to meet our commercial timelines and objectives or to meet regulatory requirements. We may not be able to maintain, improve or renew our arrangements with these third parties or enter into new, alternative arrangements with other service providers, on acceptable terms or at all. Third parties could terminate or decline to renew our arrangements based on their own business priorities. If we are unable to contract successfully for theseeffective third-party services related to the distribution of cabozantinib on acceptable terms, our commercialization efforts and those of our collaboration partners may be delayed or otherwise adversely affected, which could have a material adverse impact on our business, financial condition and results of operations.
If we are unable to obtain or maintain coverage and reimbursement for our products from third-party payers, our business will suffer.
Our ability to commercialize our products successfully is highly dependent on the extent to which health insurance coverage and reimbursement is, and will be, available from third-party payers, including governmental payers, such as Medicare and Medicaid, and private health insurers. Third-party payers continue to scrutinize and manage access to pharmaceutical products and services and may limit reimbursement for newly approved products and indications. Patients are generally not capable of paying for CABOMETYX or COMETRIQ themselves and rely on third-party payers to pay for, or subsidize, the costs of their medications, among other medical costs. Accordingly, market acceptance of CABOMETYX and COMETRIQ is dependent on the extent to which coverage and reimbursement is available from third-party payers. If third-party payers do not provide coverage or reimbursement for CABOMETYX or COMETRIQ, our revenues and results of operations will suffer. In addition, even if third-party payers provide some coverage or reimbursement for CABOMETYX or COMETRIQ, the availability of such coverage or reimbursement for prescription drugs under private health insurance and prospects.managed care plans, which often varies based on the type of contract or plan purchased, may not be sufficient for patients to afford CABOMETYX or COMETRIQ.
We are subject to certain healthcare laws, regulationregulations and enforcement; our failure to comply with those laws could have a material adverse effectimpact on our business, financial condition and results of operations and financial condition.*operations.
We are subject to certainfederal and state healthcare laws and regulations, which laws and enforcementregulations are enforced by the federal government and the states in which we conduct our business. Should our compliance controls prove ineffective at preventing or mitigating the risk and impact of improper business conduct or inaccurate reporting, we could be subject to enforcement of the laws that may affect our ability to operate include,following, including, without limitation:
•the federal Anti-Kickback Statute, or AKS, which governs our business activities, including our marketing practices, medical educational programs, pricing policies, and relationships with healthcare providers or other entities. The AKS prohibits, among other things, persons and entities from knowingly and willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either entities;
•the referral of an individual for, or the purchase, order or recommendation of, any good or service for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs. Remuneration is not defined in the AKS and has been broadly interpreted to include anything of value, including for example, gifts, discounts, coupons, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments, ownership interests and providing anything at less than its fair market value. The AKS has been broadly interpreted to apply to manufacturer arrangements with prescribers, purchasers and formulary managers, among others;
the Federal Food, Drug, and Cosmetic Act or FDCA,(FDCA) and its implementing regulations, which prohibit, among other things, the introduction or delivery for introduction into interstate commerce of any food, drug device, or cosmetic that is adulterated or misbranded;

•federal civil and criminal false claims laws, including the civil False Claims Act, and civil monetary penalty laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid, or other third-party payers that are false or fraudulent, or making a false statement to avoid, decrease or conceal an obligation to pay money to the federal government;
•federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program or making false statements relating to healthcare matters;
•the Health Insurance Portability and Accountability Act of 1996 or HIPAA, as amended by the Health Information Technology for Economic(HIPAA) and Clinical Health Act, and theirits implementing regulations, which impose certain requirements relating to the privacy, security and transmission of individually identifiable health information;information on covered entities and business associates that access such information on behalf of a covered entity;
•state law equivalents of each of the above federal laws;
41
Table of Contents
•the Open Payments program of the Patient Protection and Affordable Care Act, as amended by the Healthcare and Education Reconciliation Act (PPACA), which was created under the Physician Payments Sunshine Act and its implementing regulations and requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid, or the Children’s Health Insurance Program, with specific exceptions, to report annually to the government information related to certain payments and other transfers of value to physicians (as defined by such law) and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;
•state and local laws suchand regulations that require drug manufacturers to file reports relating to marketing activities, payments and other remuneration and items of value provided to healthcare professionals and entities, as anti-kickbackwell as state and false claimslocal laws whichrequiring the registration of pharmaceutical sales representatives; and
•state and federal pharmaceutical price and price reporting laws and regulations that require us to provide notice of price increases or the introduction of new high-cost products, and/or file complex ancillary reports concerning prices and pricing and discount practices.
In addition, we may applybe subject to items or services reimbursed by any third-party payer, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts;
the Foreign Corrupt Practices Act, a U.S. law which regulates certain financial relationships with foreign government officials (which could include, for example, certain medical professionals);
professionals employed by national healthcare programs) and its foreign equivalents, as well as federal and state consumer protection and unfair competition laws, which broadly regulate marketplace activities and activities that potentially harm consumers;laws.
federal and state government price reporting laws that require us to calculate and report complex pricing metrics to government programs, where such reported prices may be used in the calculation of reimbursement and/or discounts on our marketed drugs, as well as certain state and municipal government price reporting laws that require us to provide justifications where drug prices exceed a certain price increase threshold (and participation in these programs and compliance with the applicable requirements may subject us to potentially significant discounts on our products, increased infrastructure costs, and could potentially affect our ability to offer certain marketplace discounts);
federal and state financial transparency laws, which generally require certain types of expenditures in the U.S. to be tracked and reported (and compliance with such requirements may require investment in infrastructure to ensure that tracking is performed properly, and some of these laws result in the public disclosure of various types of payments and relationships with healthcare providers and healthcare entities, which could potentially have a negative effect on our business and/or increase enforcement scrutiny of our activities);
proposals by state legislatures and regulators to impose caps on the amount that pharmaceutical manufacturers may compensate healthcare providers for certain services (which could potentially restrict, or increase enforcement scrutiny with respect to, certain of our activities); and
These federal and state healthcare fraud and abuse laws FDA rules and regulations as well as false claims laws, including the civil False Claims Act, which govern certaindrug marketing practices, including off-label promotion.
If our operations are found, or even alleged, to be in violation of any of the laws described above or any other governmental regulations that apply to us, we, or our officers or employees, may be subject to significant penalties, including administrative civil and criminal penalties, damages, fines, regulatory penalties, the curtailment or restructuring of our operations, exclusion from participation in Medicare, Medicaid and other federal and state healthcare programs, imprisonment, reputational harm, additional reporting requirements and oversight, if we become subject to a corporate integrity agreement or similar agreement, any of which would adversely affect our ability to sell our products and operate our business and also adversely affect our financial results. Of particular concern are suits filed under the civil False Claims Act, known as “qui tam” actions, which can be brought by any individual on behalf of the government. SuchUnder the False Claims Act, these individuals, commonly known as relators or “whistleblowers,” may potentially then share in amounts paid by the entity to the government in fines or settlement. The filing of qui tam actions has caused a number of pharmaceutical, medical device and other healthcare companies to have to defend civil False Claims Act actions. When an entity is determined to have violated the civil False Claims Act, or settles a lawsuit brought pursuant to the False Claims Act to avoid further prosecution, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for each separate false claim. Defending against any such actions can be costly, time-consuming and may require significant financial and personnel resources. Therefore, even if we are successful in defending against any such actions that may beaction is brought against us, our business may be impaired.impaired, even if we are ultimately successful in our defense.
Current healthcare laws and regulations in the U.S. and future legislative or regulatory reforms to the U.S. healthcare system may affect our ability to commercialize our marketed products profitably.
Federal and state governments in the U.S. are considering legislative and regulatory proposals to change the U.S. healthcare system in ways that could affect our ability to continue to commercialize CABOMETYX and COMETRIQ profitably. Similarly, among policy makers and payers, there is significant interest in promoting such changes with the stated goals of containing healthcare costs, improving quality and expanding patient access. The life sciences industry and specifically the market for the sale, insurance coverage and distribution of pharmaceuticals has been a particular focus of these efforts and would likely be significantly affected by any major legislative or regulatory initiatives.
We face related uncertainties as a result of efforts to repeal, substantially modify or invalidate some or all of the provisions of the PPACA. Notably, in December 2018, a Texas U.S. District Court Judge ruled that the PPACA is unconstitutional in its entirety because the penalty enforcing the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. Then, in December 2019, the U.S. Court of Appeals for the 5th Circuit upheld this District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining provisions of the PPACA are invalid as well. While the U.S. Supreme Court has agreed to review an appeal of the 5th Circuit’s decision in November 2020, it is unclear how this decision, future decisions, subsequent appeals and other efforts will impact the PPACA. Additionally, the 2020 federal spending package permanently repealed, effective January 1, 2020, the PPACA-mandated “Cadillac” tax on high-cost employer-sponsored health coverage and medical device taxes, and, effective January 1, 2021, also eliminates the health insurer tax. Although such efforts have not significantly impacted our business to date, there is no assurance that the repeal, modification or invalidation of some or all of the provisions of the PPACA in the future, will not have a material adverse impact on our business, financial
42
Table of Contents
condition and results of operations, and we cannot predict how future federal or state legislative or administrative changes relating to healthcare reform will affect our business.
In addition, there are pending federal and state-level legislative proposals that would significantly expand government-provided health insurance coverage, ranging from establishing a single-payer, national health insurance system to more limited “buy-in” options to existing public health insurance programs, each of which could have a significant impact on the healthcare industry. It is also possible that additional governmental actions will be taken to address the ongoing COVID-19 pandemic, and that such actions would have a significant impact on these public health insurance programs. While we cannot predict how future legislation (or enacted legislation that has yet to be implemented) will affect our business, such proposals could have the potential to impact access to and sales of our products.
As a result of these developments and trends, third-party payers are increasingly attempting to contain healthcare costs by limiting coverage and the level of reimbursement of new drugs. These entities could refuse, limit or condition coverage for our products, such as by using tiered reimbursement or pressing for new forms of contracting, including, for example, the movement by insurers towards “value-based” contracting, any of which could adversely affect product sales. Furthermore, the expansion of the 340B Drug Discount Program has increased the number of purchasers who claim eligibility for significant discounts on branded drugs, including our marketed products. Due to the current volatility in regulatory and market dynamics, we are unable to predict the impact of any legislative, regulatory, third-party payer or policy actions, including potential cost containment and healthcare reform measures. If enacted, any such measures could have a material adverse impact on our business, financial condition and results of operations.
Pricing for pharmaceutical products in the U.S. has come under increasing attention and scrutiny by federal and state governments, legislative bodies and enforcement agencies. These activities may result in actions that have the effect of reducing our revenue or harming our business or reputation.
There have been several recent U.S. Congressional inquiries, hearings and proposed and enacted federal legislation and rules, as well as Executive Orders, designed to, among other things: reduce or limit the prices of drugs and make them more affordable for patients (including, for example, by tying the prices that Medicare reimburses for physician-administered drugs to the prices of drugs in other countries); reform the structure and financing of Medicare Part D pharmaceutical benefits, including through increasing manufacturer contributions to offset Medicare beneficiary costs; bring more transparency to drug pricing rationale and methodologies; revise rebate payments for prescription drugs under Medicaid and the methodologies to calculate average manufacturer price and best price; and facilitate the importation of certain lower-cost drugs from other countries. While we cannot know the final form of any such legislative, regulatory and/or administrative measures, some of the pending legislative proposals or executive rulemaking, such as those incorporating International Pricing Index or Most-Favored-Nation models, if enacted, would likely have a significant and far-reaching impact on the biopharmaceutical industry and therefore also likely have a material adverse impact on our business, financial condition and results of operations.
In connection with its evaluation of proposals concerning the pricing of, and access to, pharmaceutical products, many companies in our industry have received governmental requests for documents and information relating to drug pricing and patient support programs. We could receive a similar request, which would require us to incur significant expense and divert the attention of management. Additionally, to the extent there are findings, or even allegations, of improper conduct on the part of the company, these findings could further harm our business, reputation and/or prospects.
At the state level, legislatures have increasingly passed legislation and implemented regulations designed to control pharmaceutical and biological product pricing, including restrictions on pricing or reimbursement at the state government level, limitations on discounts to patients, marketing cost disclosure and transparency measures, and, in some cases, policies to encourage importation from other countries (subject to federal approval) and bulk purchasing, including the National Medicaid Pooling Initiative. For example, California adopted SB-17, which requires, among other provisions, pharmaceutical manufacturers to provide advance notice of price increases above a defined threshold to certain purchasers and related reports to the government. Such obligations to provide notices of price increases to purchasers may influence customer ordering patterns for CABOMETYX and COMETRIQ, which in turn may increase the volatility of our revenues as a reflection of changes in inventory volumes. Furthermore, adoption of these drug pricing transparency regulations, and our associated compliance obligations, may increase general and administrative costs and/or diminish our revenues as a result of the imposition of caps on pricing and price increases. Therefore, the implementation of these cost-containment measures or other healthcare reforms may result in fluctuations in our results of operations and limit our ability to generate product revenue or commercialize our products.
43
Table of Contents
Lengthy regulatory pricing and reimbursement procedures and cost control initiatives imposed by governments outside the U.S. could delay the marketing of and/or result in downward pressure on the price of our approved products resulting in a decrease in revenue.
Outside the U.S., particularly in the EU, the pricing and reimbursement of prescription pharmaceuticals is generally subject to governmental control. In EU countries, pricing and reimbursement negotiations with governmental authorities or payers can take six to 12 months or longer after the initial marketing authorization is granted for a product, or after the marketing authorization for a new indication is granted. This can substantially delay broad availability of the product. To obtain reimbursement and/or pricing approval in some countries, our collaboration partner Ipsen may also be required to conduct a study that seeks to establish the cost effectiveness of CABOMETYX compared with other available established therapies. The conduct of such a study could also result in delays in the commercialization of CABOMETYX. Additionally, cost-control initiatives, increasingly based on affordability, could decrease the price we and Ipsen might establish for CABOMETYX, which would result in lower license revenues to us.
A significant and prolonged economic downturn, whether globally or just within the U.S., could have a substantial impact on our revenues and financial condition.
Our revenues are substantially dependent on the net pricing that we ultimately realize in payment for our marketed products, and commercial third-party payers do not receive the same degree of discounts and allowances that we provide to government payers. In the event of a significant and prolonged economic downturn, the number of patients enrolled in commercial health insurance programs is likely to decrease, particularly in the U.S. where workforce reductions could cause widespread loss of the private health insurance coverage typically provided by employers, and a commensurate shift of eligible individuals to government insurance programs or to the circumstance of lacking health insurance coverage altogether. The effects of the COVID-19 pandemic, among other catalysts, have already caused a downturn in the U.S. and global economy and significant levels of unemployment, and the duration and severity of this economic downturn are not yet known. Depending on the duration and severity of the COVID-19 pandemic, as well as other factors, we could experience a substantial decrease in revenues as a result of the increase in gross-to-net discounting applied to the price of our products due to a substantial shift from private health insurance coverage to government insurance coverage, and also a significant increase in demand for our patient assistance and/or free drug program, all or any of which would adversely affect our product revenues.
Enhanced governmental and private scrutiny over, or investigations or litigation involving, pharmaceutical manufacturer donations to patient assistance programs offered by charitable foundations could negatively impact our business practices, harm our reputation, divert the attention of management and increase our expenses.
To help patients afford our products, we have a patient assistance program and also occasionally make donations to independent charitable foundations that help financially needy patients. These types of programs designed to assist patients with affording pharmaceuticals have become the subject of Congressional interest and enhanced government scrutiny. The U.S. Department of Health and Human Services Office of Inspector General established specific guidelines permitting pharmaceutical manufacturers to make donations to charitable organizations that provide co-pay assistance to Medicare patients, provided that manufacturers meet certain specified compliance requirements. In the event we make such donations but are found not to have complied with these guidelines and other laws or regulations respecting the operation of these programs, we could be subject to significant damages, fines, penalties or other criminal, civil or administrative sanctions or enforcement actions. We also rely on a third-party hub provider and exercise oversight to monitor patient assistance program activities. Hub providers are generally hired by manufacturers to assist patients with insurance coverage, financial assistance and treatment support after the patients receive a prescription from their healthcare professional. For manufacturers of specialty pharmaceuticals (including our marketed products), the ability to have a single point of contact for their therapies helps ensure efficient medication distribution to patients. Accordingly, our hub activities are also subject to scrutiny and may create risk for us if not conducted appropriately. A variety of entities, including independent charitable foundations and pharmaceutical manufacturers, but not including our company, have received subpoenas from the U.S. Department of Justice and other enforcement authorities seeking information related to their patient assistance programs and support. Should we receive a subpoena or other process, regardless of whether we are ultimately found to have complied with the regulations governing patient assistance programs, this type of government investigation could negatively impact our business practices, harm our reputation, divert the attention of management and increase our expenses.
44
Table of Contents
We are subject to laws and regulations relating to privacy, data protection and the collection and processing of personal data. Failure to maintain compliance with these regulations could create additional liabilities for us.
The legislative and regulatory landscape for privacy and data protection continues to evolve globally and there has been an increasing amountin the U.S. For example, the California Consumer Privacy Act of focus2018 (CCPA) went into operation on January 1, 2020 and affords California residents expanded privacy rights and protections, including civil penalties for violations and statutory damages under a private right of action for data protection issues with the potential to affect our business, including state security breach notification laws, state health informationbreaches. Similar legislative proposals are being advanced in other states and Congress is also considering federal privacy laws and federal and state consumer protection laws,

govern the collection, use and disclosure of personal information.legislation. In addition, most healthcare providers who are expected to prescribe our products and from whom we obtain patient health information are subject to privacy and security requirements under HIPAA. Although we are not directly subject to HIPAA, we could be subject to criminal penalties if we knowingly obtainencourage, assist or otherwise facilitate a HIPAA-covered entity (or its business associate) to use or disclose individually identifiable health information from a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA. Other countries also have, or are developing, laws governing the collection, use and transmission of personal information. For example, the EU Data Privacy Directive (95/46/EC), which will be replaced on May 28, 2018 by the more restrictive General Data Protection Regulation (Regulation (EU) 2016/679) and the Swiss Federal Act on Data Protection, regulate679 (GDPR) regulates the processing of personal data of individuals within the European UnionEU, even if, under certain circumstances, that processing occurs outside the EU, and between countries in the European Union andalso restricts transfers of such data to countries outside of the European Union,EU, including the U.S. FailureShould we fail to provide adequate privacy or data security protections andor maintain compliance with these laws and regulations, including the new EU-U.S. Privacy Shield framework, which will replace the previous safe harbor mechanisms,CCPA and GDPR, we could jeopardize business transactions across borders and resultbe subject to sanctions or other penalties, litigation or an increase in significant penalties, These laws could create liability for us or increase our cost of doing business.
If we are unableLegislation and regulatory action designed to obtain both adequate coverage and adequate reimbursement from third-party payers for CABOMETYX or COMETRIQ, our revenues and prospects for profitability will suffer.
Our ability to commercialize CABOMETYX or COMETRIQ successfully is highly dependent onfacilitate the extent to which coverage and reimbursement is, and will be, available from third-party payers, including governmental payers, such as Medicare and Medicaid, and private health insurers. Patients may not be capable of paying for CABOMETYX or COMETRIQ themselves and may rely on third-party payers to pay for, or subsidize, the costs of their medications, among other medical costs. If third-party payers do not provide coverage or reimbursement for CABOMETYX or COMETRIQ, our revenues and prospects for profitability will suffer. In addition, even if third-party payers provide some coverage or reimbursement for CABOMETYX or COMETRIQ, the availability of such coverage or reimbursement for prescription drugs under private health insurance and managed care plans, which often varies based on the type of contract or plan purchased, may not be sufficient for patients to afford cabozantinib. There has been negative publicity regarding, and increasing legislative and enforcement interest in the U.S. with respect to, drug pricing and the use of specialty pharmacies, which may result in physicians being less willing to participate in our patient access programs and thereby limit our ability to increase patient accessdevelopment, approval and adoption of cabozantinib. Specifically, there have been several recent U.S. Congressional inquiries and proposed bills designed to, among other things, bring more transparency to drug pricing, review the relationship between pricing and manufacturer patient programs, reduce the price of drugs under Medicare, and reform government program reimbursement methodologies for drugs. If future legislation were to impose direct governmental price controls and access restrictions, it could have a significant adverse impact on our business and financial results.
In addition, in some foreign countries, particularly in the European Union, the pricing of prescription pharmaceuticals is subject to governmental control under the respective national health system. In these countries, price negotiations with governmental authorities or payers can take six to twelve months or longer after marketing authorization is granted for a product, which has the potential to substantially delay broad availability of the product in some of those countries. To obtain reimbursement and/or pricing approval in some countries, we and our collaboration partner, Ipsen, may be required to conduct a study that seeks to establish the cost effectiveness of CABOMETYX compared with other available established therapies to support health technology appraisal. The conduct of such a study could be expensive and result in delays in the commercialization of CABOMETYX. Third-party payers are challenging the prices charged for medicinal products and services, and many third-party payers limit reimbursement for newly-approved health care products. In particular, third-party payers may limit the indications for which they will reimburse patients who use CABOMETYX or COMETRIQ. Cost-control initiatives could decrease the price we and our collaboration partner, Ipsen, might establish for CABOMETYX, which would result in lower license revenues to us.
Current healthcare laws and regulations and future legislative or regulatory reforms to the healthcare system may affect our ability to sell CABOMETYX and COMETRIQ profitably.*
The U.S. and some foreign jurisdictions are considering or have enacted a number of legislative and regulatory proposals to change the healthcare system in ways that could affect our ability to sell CABOMETYX and COMETRIQ profitably. Among policy makers and payers in the U.S. and elsewhere, there is significant interest in promoting changes in healthcare systems with the stated goals of containing healthcare costs, improving quality and/or expanding access. In the U.S., the pharmaceutical industry has been a particular focus of these efforts and has been significantly affected by major legislative initiatives.
Since its enactment, there have been judicial and Congressional challenges to numerous provisions of the Affordable Care Act,as well as recent efforts by the Trump administration to repeal or replace certain aspects of the

Affordable Care Act. Since January 2017, President Trump has signed two Executive Orders designed to delay the implementation of any certain provisions of the Affordable Care Act or otherwise circumvent some of the requirements for health insurance mandated by the Affordable Care Act. The Trump administration has also announced that it will discontinue the payment of cost-sharing reduction (CSR) payments to insurance companies until Congress approves the appropriation of funds for the CSR payments. The loss of the CSR payments is expected to increase premiums on certain policies issued by qualified health plans under the Affordable Care Act. A bipartisan bill to appropriate funds for CSR payments has been introduced in the Senate, but the future of that bill is uncertain. Further, each chamber of Congress has put forth multiple bills this year designed to repeal or repeal and replace portions of the Affordable Care Act. Although none of these measures has been enacted by Congress to date, Congress may consider other legislation to repeal and replace elements of the Affordable Care Act. Moreover, certain politicians, including the President, have announced plans to regulate the prices of pharmaceutical products. Congress has also signaled an intent to address pharmaceutical pricing, with Senate hearings to examine the cost of prescription drugs held on June 13 and October 17, 2017. Federal legislators have proposed legislation that would require pharmaceutical manufacturers to report price increases and provide a public justification for increases that exceed given benchmarks and authorize the U.S. Department of Health and Human Services to negotiate the price of Part D prescription drugs. Other proposals would allow drug importation from Canada and potentially other countries. We cannot know what form any such measures may take or the market’s perception of how such proposals and provisions would affect us. Any reduction in reimbursement from government programs may result in a similar reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may limit our ability to generate revenue or commercialize our current products and/or those for which we may receive regulatory approval in the future.
In August 2017, President Trump signed the FDA Reauthorization Act of 2017, which will reauthorize the FDA user fee programs for prescription drugs, generic drugs medical devices, and biosimilars, under which manufacturers of such products partially pay for the FDA’s pre-market review of their product candidates. The legislation includes, inter alia, measures to expedite the development and approval of generic products, where generic competition is lacking even in the absence of exclusivities or listed patents. The FDA has also released a Drug Competition Action Plan, which proposes actions to broaden access to generic drugs and lower consumers’ health care costs by, among other things, improving the efficiency of the generic drug approval process and supporting the development of complex generic drugs. We cannot predict what form such regulatory actions may take and how they could affect us.
As a result of the overall trend towards cost-effectiveness criteria and managed healthcare in the U.S., third-party payers are increasingly attempting to contain healthcare costs by limiting both coverage and the levelentrance of reimbursementgeneric competitors, could limit the commercial potential of new drugs. These entities could refuse or limit coverage for CABOMETYX and COMETRIQ, such as by using tiered reimbursement,our products, which would adversely affect demand for CABOMETYX and COMETRIQ. They may also refuse to provide coverage for uses of CABOMETYX and COMETRIQ for medical indications other than those for which the FDA has granted market approval. As a result, significant uncertainty exists as to whether and how much third-party payers will cover newly approved drugs, which in turn will put pressure on the pricing of drugs. Due to the volatility in the current economic and market dynamics, we are unable to predict the impact of any unforeseen or unknown legislative, regulatory, third-party payer or policy actions, which may include cost containment and healthcare reform measures. Such policy actions could have a material adverse impact on our revenuesbusiness, financial condition and prospects for profitability.results of operations.
Pricing for pharmaceutical products has come under increasing scrutiny by governments, legislative bodies and enforcement agencies. These activities may result in actions that have the effect of reducing our revenue or harming our business or reputation.*
Many companies in our industry have received a governmental request for documents and information relating to drug pricing and patient support programs. We could receive a similar request, which would require us to incur significant expense and result in distraction for our management team. Additionally, to the extent there are findings, or even allegations, of improper conduct on the part of the company, such findings could further harm our business, reputation and/or prospects. It is possible that such inquiries could result in negative publicity or other negative actions that could harm our reputation; changes in our product pricing and distribution strategies; reduced demand for our approved products and/or reduced reimbursement of approved products, including by federal health care programs such as Medicare and Medicaid and state health care programs.
In addition, the Trump Administration has indicated interest in taking measures pertaining to drug pricing, including potential proposals relating to Medicare price negotiations, importation of drugs from other countries and facilitating value-based arrangements between manufacturers and payers. At this time, it is unclear whether any of these proposals will be pursued and how they would impact our products or our future product candidates.

State and local governments continue to consider prescription drug pricing transparency proposals. In October 2017, California Governor Jerry Brown signed legislation requiring pharmaceutical manufacturers to report certain price increases. We will review the specific provisions of this new law to assess how it will impact public perception or how it might otherwise affect us. Additionally, Ohio voters will consider a ballot initiative on November 7, 2017, which would require state agencies to pay no more for prescription drugs than the price paid by the U.S. Department of Veterans Affairs. We cannot predict the outcome of this ballot initiative, the market’s perception or the potential impact on us.
Our competitors may develop products and technologies that impair the value of cabozantinib, cobimetinib and any future product candidates.
The pharmaceutical, biopharmaceutical and biotechnology industries are highly diversified and are characterized by rapid technological change. In particular, the area of novel oncology therapies is a rapidly evolving and competitive field. Specifically, the indication of advanced RCC is highly competitive and several novel therapies and combinations of therapies are in advanced stages of clinical development in this indication, and may compete with or displace cabozantinib. We face, and will continue to face, intense competition from biotechnology, biopharmaceutical and pharmaceutical companies, as well as academic research institutions, clinical reference laboratories and government agencies that are pursuing research activities similar to ours. Some of our competitors have entered into collaborations with leading companies within our target markets, including some of our existing collaborators. Some of our competitors are further along in the development of their products than we are. Delays in the development of cabozantinib or cobimetinib for the treatment of additional tumor types, for example, could allow our competitors to bring products to market before us. Our future success will depend upon our ability to maintain a competitive position with respect to technological advances and the shifting landscape of therapeutic strategy following the advent of immunotherapy. Our products may become less marketable if we are unable to successfully adapt our development strategy to address the likelihood that this new approach to treating cancer with immuno-oncology agents will become prevalent in indications for which our products are approved, most notably advanced RCC, and in additional indications where we may seek regulatory approval. Furthermore, the complexities of such a strategy has and may continue to require collaboration with some of our competitors.
The markets for which we intend to pursue regulatory approval of cabozantinib and for which Roche and Genentech intend to pursue regulatory approval for cobimetinib are highly competitive. Further, our competitors may be more effective at using their technologies to develop commercial products. Many of the organizations competing with us have greater capital resources, larger research and development staff and facilities, more experience in obtaining regulatory approvals and more extensive product manufacturing and commercial capabilities than we do. As a result, our competitors may be able to more easily develop technologies and products that would render our technologies and products, and those of our collaborators, obsolete and noncompetitive. There may also be drug candidates of which we are not aware at an earlier stage of development that may compete with cabozantinib, cobimetinib, and our other product candidates.
If competitors use litigation and regulatory means to obtain approval for generic versions of cabozantinib, our business will suffer.
Under the FDCA, the FDA can approve an Abbreviated New Drug Application, or ANDA for a generic version of a branded drug without the applicant undertaking the human clinical testing necessary to obtain approval to market a new drug. The FDA can also approve a New Drug Application (NDA) under section 505(b)(2) NDAof the FDCA that relies in whole or in part on the agency’s findings of safety and/or effectiveness for a previously approved drug. The filing ofBoth the ANDA and 505(b)(2) processes are discussed in more detail under “Item 1. Business—Government Regulation—FDA Review and Approval” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 25, 2020. In either case, if an ANDA or 505(b)(2) NDAapplicant submits an application referencing one of our marketed products prior to the expiry of one or more our Orange Book-listed patents for the applicable product, we may litigate with respectthe potential generic competitor to cabozantinibprotect our patent rights, which would result in substantial costs and divert the attention of management, and could have an adverse impact on our stock price. Moreover, if any such ANDAsFor example, we received Paragraph IV certification notice letters from MSN concerning the ANDA that it had filed with the FDA seeking approval to market a generic version of CABOMETYX tablets. It is possible that MSN or other companies, following FDA approval of an ANDA or 505(b)(2) NDAs were to be approved and theNDA, could introduce generic versions of our marketed products before our patents covering cabozantinib wereexpire if they do not upheld in litigation,infringe our patents or if it is determined that our patents are invalid or unenforceable, and we expect that generic cabozantinib products would be offered at a significantly lower price compared to our marketed cabozantinib products. Therefore, regardless of the regulatory approach, the introduction of a generic competitor is found not to infringe these patents, the resulting generic competition would negatively affectversion of cabozantinib could significantly decrease our revenues and thereby materially harm our business, financial condition and results of operations.
The U.S. federal government has also taken numerous legislative and regulatory actions to expedite the development and approval of generic drugs and biosimilars. In this regard,August 2017, President Trump signed the FDA Reauthorization Act of 2017, which reauthorized the FDA user fee programs for prescription drugs, generic equivalents,drugs, medical devices, and biosimilars, under which must meetapplicants for such products partially pay for the same quality standards asFDA’s pre-market review of their product candidates and pay other specified fees. The legislation also includes, inter alia, measures to expedite the brandeddevelopment and approval of generic products, where generic competition is lacking even in the absence of exclusivities or listed patents. In addition, the FDA has also released a Drug Competition Action Plan, which proposes actions to broaden access to generic drugs would be significantly less costly than ours to bring to market. Companies that produce generic equivalents are generally able to offer their products atand lower prices. Thus, regardlessconsumers’ healthcare costs by, among other things, improving the efficiency of the generic drug approval process and supporting the development of complex generic drugs, and the FDA has taken steps to implement this plan. Moreover, both Congress and the FDA are considering various legislative and regulatory approval pathway, afterproposals focused on drug competition, including legislation focused on drug patenting and provision of drug to generic applicants for testing. For example, the introductionCreating and Restoring Equal Access To Equivalent Samples (CREATES) Act of a generic competitor, a significant percentage2019, signed into law as part of the sales2019 year-end federal spending package, purports to promote competition in the market for drugs and biological products by facilitating the timely entry of anylower-cost generic and biosimilar versions of those drugs and biological products, including by allowing generic manufacturers access to branded product are typically lostdrug samples. While the FDA has yet to issue guidance on the provisions of CREATES, its provisions do have the potential to facilitate the development and future approval of generic product.versions of our products, introducing generic competition that could have a material adverse impact on our business, financial condition and results of operations.
45
Table of Contents
Clinical testing of cabozantinib for new indications, or of new potential product candidates, is a lengthy, costly, complex and uncertain process and may fail to demonstrate safety and efficacy.*
Clinical trials are inherently risky and may reveal that cabozantinib, despite its approval for certain indications, or a new product candidate, even if it is approved for other indications, is ineffective or has an unacceptable safety profile thatwith respect to an intended use. Such results may significantly decrease the likelihood of regulatory approval inof that product for a newparticular indication. For example, COMET-1 and COMET-2, our two phase 3 pivotal trials of cabozantinib in metastatic castration-resistant prostate cancer, or mCRPC, failed to meet their respective primary endpoints of

demonstrating a statistically significant increase in OS for patients treated with cabozantinib as compared to prednisone and to demonstrate improvement in pain response for patients treated with cabozantinib as compared to mitoxantrone/prednisone. Based onMoreover, the outcome of the COMET trials, we deprioritized the clinical development of cabozantinib in mCRPC.
The results of preliminary studies do not necessarily predict clinical or commercial success, and later-stagelate-stage or other potentially label-enabling clinical trials may fail to confirm the results observed in earlier-stageearly-stage trials or preliminary studies. Although we have established timelines for manufacturing and clinical development of cabozantinib and our other product candidates based on existing knowledge of our compounds in development and industry metrics, we may not be able to meet those timelines.
We may experience numerous unforeseen events, during or as a result of clinical testing,investigations, that could delay or prevent commercialization of cabozantinib (or of other product candidates) in new indications, and in some cases, as described in the risk factor titled, “If the COVID-19 pandemic is further prolonged or becomes more severe, our product candidates, including:business operations and corresponding financial results could suffer, which could have a material adverse impact on our financial condition and prospects for growth,” the COVID-19 pandemic has already increased and may further increase the potential for such developments to occur. These may include:
•lack of acceptable efficacy or harmful side effects;a tolerable safety profile;
•negative or inconclusive clinical trial results maythat require us to conduct further testing or to abandon projects that we had expected to be promising;projects;
•discovery or commercialization by our competitors may discover or commercializeof other compounds or therapies that show significantly improved safety or efficacy compared to cabozantinib or our other product candidates;
•our inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs;sites;
•lower-than-anticipated patient registration or enrollment in our clinical testing may be lower than we anticipate, resulting in the delay or cancellation of clinical testing;
•failure by our collaboratorscollaboration partners to provide us with an adequate and timely supply us on a timely basisof product that complies with the product requiredapplicable quality and regulatory requirements for a combination trial;
•failure of our third-party contract research organizationorganizations or investigators to satisfy their contractual obligations, including deviating from any trial protocol;protocols; and
•withholding of authorization from regulators or institutional review boards may withhold authorization to commence or conduct clinical trials of a product candidate, or delay, suspenddelays, suspensions or terminateterminations of clinical research for various reasons, including noncompliance with regulatory requirements or theira determination by these regulators and institutional review boards that participating patients are being exposed to unacceptable health risks.
If we were to have significantthere are further delays in or termination of ourthe clinical testing of cabozantinib or our other product candidates as a result ofdue to any of the events described above or otherwise, including as a result of the COVID-19 pandemic, our expenses could increase and our ability to generate revenues could be impaired, either of which could adversely impact our financial results. Furthermore, we rely on our collaboration partners to fund a significant portion of our clinical development programs. Should one or all of our collaboration partners decline to support future planned clinical trials, we will be entirely responsible for financing the further development of cabozantinib or our other product candidates and, as a result, we may be unable to execute our current business plans, which could have a material adverse impact on our business, financial condition and results of operations.
We may not be able to rapidly or effectively continuepursue the further development of cabozantinib or our other product candidates or meet current or future requirements of the FDA or regulatory authorities in other jurisdictions including those identified based onin accordance with our discussions with the FDAstated timelines or such other regulatory authorities.at all. Our planned clinical trials may not begin on time, or at all, may not be completed on schedule, or at all, may not be sufficient for registration of our product candidates or may not result in an approvable product.
Completion of clinical trials may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of the product candidate. The duration and the cost of clinical trials may vary significantly over the life of a project as a result of factors relating to the clinical trial, including, among others:
characteristics of the product candidate under investigation; the number of patients who ultimately participate in the clinical trial;
the duration of patient follow-up that is appropriate in view of the results or required by regulatory authorities;
follow-up; the number of clinical sites included in the trials; and
the length of time required to enroll suitable patient subjects.eligible patients.
Any delay could limit our ability to generate revenues, cause us to incur additional expense and cause the market price of our common stock to decline significantly. Our partners under our collaboration agreements may experience similar risks with respect to the compounds we have out-licensed to them. If any of the events described above were to occur with such programs or compounds, the likelihood of receipt of milestones and royalties under such collaboration agreements could decrease.

46
Table of Contents
The regulatory approval processes of the FDA and comparable foreign regulatory authorities are lengthy and uncertain and may not result in regulatory approvals for cabozantinib or our other product candidates, which could adversely affecthave a material adverse impact on our business.business, financial condition and results of operations.
The activities associated with the research, development and commercialization of cabozantinib and our products andother product candidates are subject to extensive regulation by the FDA and other regulatory agencies in the U.S. and, as well as by comparable authorities in other countries. We have only limited experience in preparing and filing the applications necessary to gain regulatory approvals. The processprocesses of obtaining regulatory approvals in the U.S. and other foreign jurisdictions is expensive and often takes many years, if approval is obtained at all, and they can vary substantially based upon the type, complexity and novelty of the product candidates involved. For example, before an NDA or sNDA can be submitted to the FDA, or a marketing authorization application to the European Medicines AgencyEMA or any application or submission to regulatory authorities in other jurisdictions, the product candidate must undergo extensive clinical trials, which can take many years and require substantial expenditures.
Any clinical trial may fail to produce results satisfactory to the FDA or regulatory authorities in other jurisdictions. For example, the FDA could determine that the design of a clinical trial is inadequate to produce reliable results. The regulatory process also requires preclinical testing, and data obtained from preclinical and clinical activities are susceptible to varying interpretations. The FDA has substantial discretion in the approval process and may refuse to approve any NDA or sNDA or decide that our data is insufficient for approval and require additional preclinical, clinical or other studies. For example, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of cabozantinib for any individual additional indications.
In addition, we may encounter delays or rejections may be encountered based upon changes in regulatory policy, for product approval during the period of product development and regulatory agency review, which maycould cause delays in the approval or rejection of an application for cabozantinib or for our other product candidates.
Even if the FDA or a comparable authority in another jurisdiction approves cabozantinib for one or more new indications, beyond advanced RCC and MTC, or one of our other product candidates, thesuch approval may be limited, imposing significant restrictions on the indicated uses, conditions for use, labeling, distribution, advertising, promotion, marketing and/or production of the product and could impose ongoing requirements for post-approval studies, including additional research and developmentclinical trials, all of which may result in significant expense and clinical trials.limit our and our collaboration partners’ ability to commercialize cabozantinib in one or more new indications. For example, in connectionbased on the regulatory feedback from the FDA, and if supported by the clinical data from COSMIC-021, we intend to file with the FDA’sFDA for accelerated approval of COMETRIQ forcabozantinib in an mCRPC indication as early as 2021. We expect that as a condition of any potential approval under the treatment of progressive, metastatic MTC, we are subjectFDA's accelerated approval pathway, the FDA will require us to perform confirmatory post-marketing requirementclinical trials to conduct aconfirm the clinical study comparing a lower dosebenefit, if any, of cabozantinib to the approved dose of 140 mg daily cabozantinib in progressive,combination with Roche’s atezolizumab in patients with locally advanced or metastatic MTC.solid tumors, such as mCRPC. Failure to complete any post-marketing requirements in accordance with the timelines and conditions set forth by the FDA could significantly increase costs or delay, limit or eliminateultimately restrict the commercialization of cabozantinib.cabozantinib in any additional indications. Further, these regulatory agencies maycould also impose various administrative, civil or criminal sanctions for failure to comply successfully with regulatory requirements, including withdrawal of product approval.
In addition, on March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in response to the COVID-19 pandemic. Amongst other provisions, the CARES Act made a number of changes to the FDCA aimed at preventing drug shortages. While we are still evaluating these and other CARES Act changes, these changes could impact our business. For example, in light of the COVID-19 pandemic, the FDA has issued a number of guidance documents describing the agency’s expectations for how drug manufacturers should comply with various FDA requirements during the pandemic, including with respect to conducting clinical trials, distributing drug samples, and reporting post-marketing adverse events. In addition, as a result of the COVID-19 pandemic, there has been increasing political and regulatory scrutiny of foreign-sourced drugs and foreign drug supply chains, resulting in proposed legislative and executive actions to incentivize or compel drug manufacturing operations to relocate to the United States. These political and regulatory developments and any further guidance documents issued by FDA that impact the requirements to which we are subject, as well as any equivalent federal or state legislative or regulatory initiatives, or similar measures outside of the United States, could have a material adverse impact on our business, financial condition and results of operations.
We may be unable to expand our development pipeline, which could limit our growth and revenue potential.
We are committed toOur business is focused on the discovery, development and promotioncommercialization of new medicines with the potential to improve care and outcomes for people with cancer.difficult-to-treat cancers. In this regard, we have resumedinvested in substantial technical, financial and human resources toward internal drug discovery effortsactivities with the goal of identifying new product candidates to advance into clinical trials. InternalNotwithstanding this investment, we temporarily suspended internal drug discovery effortsin our laboratories due to identify new product candidates require substantial technical,the COVID-19 pandemic, among other limitations to our programs described in the risk factor titled, “If the COVID-19 pandemic is further prolonged or becomes more severe, our business operations and corresponding financial results could suffer, which could have a material adverse impact on our financial condition and human resources. These internal prospects for growth.” While we have since partially resumed our drug
47
Table of Contents
discovery efforts mayoperations, even assuming we successfully return these operations to full capacity in the future, many programs that initially show promise in identifying potential product candidates, yetwill ultimately fail to yield product candidates for clinical development for a number of reasons, including where the research methodology used may not be successful in identifying potential product candidates, or where potentialmultiple reasons. For example, product candidates may, on further study, be shown to have inadequate efficacy, harmful side effects, suboptimal pharmaceutical profileprofiles or other characteristics suggesting that they are unlikely to be effectivecommercially viable products.
Apart from our internal drug discovery efforts, our strategy to expand our development pipeline is also dependent on our ability to successfully identify and acquire or in-license relevant product candidates. However, the in-licensing and acquisition of product candidates is a highly competitive area, and many other companies are pursuing the same or similar product candidates to those that we may consider attractive. EstablishedIn particular, larger companies in particular, may have a competitive advantage over us due to their size, financialwith more capital resources and more extensive clinical development and commercialization capabilities.capabilities may have a competitive advantage over us. Furthermore, companies that perceive us to be a competitor may be unwilling to assign or license rights to us. We may also be unable to in-license or acquire a relevantadditional product candidatecandidates on acceptable terms that would allow us to realize an appropriate return on our investment. If we are unable to develop suitable product candidates through internal discovery effort or if we are unable to successfully obtain rights to suitable product candidates, our business, financial

condition and prospects for growth could suffer. Even if we succeed in our efforts to obtain rights to suitable product candidates, the competitive business environment may result in higher acquisition or licensing costs. costs, and our investment in these potential products will remain subject to the inherent risks associated with the development and commercialization of new medicines. In certain circumstances, we may also be reliant on the licensor for the continued development of the in-licensed technology and their efforts to safeguard their underlying intellectual property.
With respect to acquisitions, we may not be able to integrate the target company successfully into our existing business, maintain the key business relationships of the target, or retain key personnel of an acquired business. Furthermore, we could assume unknown or contingent liabilities or incur unanticipated expenses. Any acquisitions or investments made by us also could result in our spending significant amounts, issuing dilutive securities, assuming or incurring significant debt obligations and contingent liabilities, incurring large one-time expenses and acquiring intangible assets that could result in significant future amortization expense and significant write-offs, any of which could harm our operating results.financial condition and results of operations. If our internal drug discovery or business development efforts do not result in suitable product candidates, our business and prospects for growth could suffer.
Increasing use of social media could give rise to liability and result in harm to our business.
We and our employees are increasingly utilizing social media tools and our website as a means of communication. For example, we use Facebook and Twitter to communicate with the medical community and the investing public, although we do not intend to disclose material, nonpublic information through these means. Despite our efforts to monitor social media communications, there is risk that the unauthorized use of social media by us or our employees to communicate about our products or business, or any inadvertent disclosure of material, nonpublic information through these means, may result in violations of applicable laws and regulations, which may give rise to liability and result in harm to our business. In addition, there is also risk of inappropriate disclosure of sensitive information, which could result in significant legal and financial exposure and reputational damages that could potentially have a material adverse impact on our business, financial condition and results of operations. Furthermore, negative posts or comments about us or our products on social media could seriously damage our reputation, brand image and goodwill.
Risks Related to Our Capital Requirements, Accounting and Financial Results
Our profitability could be negatively impacted by our extensive clinical development, business development and commercialization activities for cabozantinib and pipeline expansion efforts relative to the revenues we generate.
Although we reported net income of $83.4 million for the nine months ended September 30, 2020 and $321.0 million for the year ended December 31, 2019, respectively, we reported a net loss of $32.0 million for the three months ended September 30, 2020. We may not be able to resume, maintain or increase profitability on a quarterly or annual basis, and we are unable to predict the extent of future profits or losses. The amount of our net profits or losses will depend, in part, on: the level of sales of CABOMETYX and COMETRIQ in the U.S.; achievement of clinical, regulatory and commercial milestones, if any, under our collaboration agreements; the amount of royalties from sales of CABOMETYX and COMETRIQ outside of the U.S. under our collaboration agreements; other collaboration revenues; and the level of our expenses, including for development and commercialization activities for cabozantinib and for any pipeline expansion efforts. We expect to continue to spend substantial amounts to fund the continued development of cabozantinib for additional indications and the commercialization of our approved products. In addition, we intend to continue to expand our product pipeline through our internal drug discovery efforts and the execution of additional partnerships through business development activities or strategic transactions that align with our oncology drug development, regulatory and commercial expertise, which efforts could involve substantial costs. To offset these costs in the future, we will need to generate
48
Table of Contents
substantial revenues. If these costs exceed our current expectations, or we fail to achieve anticipated revenue targets, the market value of our common stock may decline.
Our financial outlook may not be realized.
From time to time, in press releases and otherwise, we may publish estimates, forecasts or other forward-looking statements regarding our future financial or operating results, including estimated revenues, expenses and earnings. Any forecast of our future performance reflects various assumptions. These assumptions are subject to significant risks and uncertainties, and as a matter of course, any number of them may prove to be incorrect. Further, the achievement of any forecast depends on numerous assumptions and other factors (including those described in this discussion), many of which are beyond our control. Moreover, the impact of the COVID-19 pandemic on our profitability, especially if it is further prolonged or grows in severity, is difficult to predict. As a result, we cannot be certain that our performance will be consistent with any management estimates or forecasts or that the variation from such estimates or forecasts will not be material and adverse. Current and potential stockholders are cautioned not to base their entire analysis of our business and prospects upon isolated estimates or forecasts, but instead are encouraged to utilize our entire publicly available mix of historical and forward-looking information, as well as other available information regarding us, our products, the competitive landscape for our products, our commercialization, development and regulatory efforts, as well as those of our collaboration partners, and the biotechnology and pharmaceutical industry generally when evaluating our prospective financial or operating results.
If additional capital is not available to us when we need it, we may be forcedunable to limit the expansion ofexpand our product development programs or commercialization efforts.*offerings and maintain business growth.
AsCash and investments were $1.5 billion as of September 30, 2017, we had $422.3 million in cash and investments, which included $417.6 million available for operations and $4.7 million2020, compared to $1.4 billion as of long-term restricted investments.December 31, 2019. Our business operations grew substantially during 20162019 and experienced further development during the first nine months ended September 30, 2017.of 2020. In order to maintain business growth and maximizeduring the clinical and commercial opportunities for cabozantinib and cobimetinib,remainder of 2020, we plan to continue to execute on theour U.S. commercialization plans for CABOMETYX, while reinvesting in our product pipeline through the continued development of cabozantinib research and developmentour other product candidates, internal discovery activities, as well as through in-licensing and acquisition efforts.the execution of strategic transactions. Our ability to execute onachieve these business objectives will depend on many factors including but not limited to:
•the commercial success of both CABOMETYX and COMETRIQ and the revenues we generate from those approved products;
•costs associated with maintaining our expanded sales, marketing, market access, medical affairs and product distribution capabilities for CABOMETYX in advanced RCC and COMETRIQ in the approved MTC indications;COMETRIQ;
•the achievement of stated regulatory and commercial milestones and royalties paid under theour collaboration agreements with Ipsen Collaboration Agreement;and Takeda;
•the commercial success of COTELLIC and the revenues generated through our share of related profits and losses for the commercialization of COTELLIC in the U.S. and royalties from COTELLIC sales outside the U.S.by products marketed under our collaboration with Genentech;and license agreements;
the potential regulatory approval of cabozantinib as a treatment for patients with previously untreated advanced RCC, and in other indications, both in the U.S. and abroad;
our ability to timely prepare and submit an sNDA for cabozantinib as a treatment for patients with advanced HCC;
•future clinical trial results;
•the impact of the COVID-19 pandemic on our futureability to conduct critical business operations, including internal drug discovery activities, clinical trials and commercial operations;
•the level of our investments in the expansion of our pipeline through internal drug discovery and corporatebusiness development activities;
our ability to control costs;
•the number and size of clinical trials we conduct and the cost of clinical drug supply for such clinical trials evaluating our clinical trials;products with other therapeutic agents;
•trends and developments in the pricing of oncologic therapeutics in the U.S. and abroad, especially in the European Union;EU;
•scientific developments in the market for oncologic therapeutics and the timing of regulatory approvals for competing oncologic therapies; and
•the filing, maintenance, prosecution, defense and enforcement of patent claims and other intellectual property rights.
Our commitment of cash resources to CABOMETYX and the reinvestment in our product pipeline through the continued development of cabozantinib continued research and developmentincreasing internal drug discovery activities, as well as through in-licensing and acquisition efforts,the execution of strategic transactions, could require us to obtain additional capital. We may seek such additional capital through some or all of the following methods: corporate collaborations,collaborations; licensing arrangements,arrangements; and public or private debt or equity financings. Our ability to obtain additional capital may depend on prevailing economic conditions and financial, business and other
49
Table of Contents
factors beyond our control. Disruptions in the U.S. and global financial markets, including disruptions that have resulted and may continue to result from the COVID-19 pandemic and the related downturn in the U.S. and global economy, as well as future potential U.S. federal government shutdowns, rising interest rate environments, increased or changed tariffs and trade restrictions or otherwise, may adversely impact the availability and cost of credit, as well as our ability to raise additional funds in the capital markets. Economic and capital markets conditions have been, and continue to be, volatile. Continued instability in these market conditions may limit our ability to access the capital necessary to fund and grow our business. In particular, our inability to access additional funds, whether due to the COVID-19 pandemic or otherwise, could in the future inhibit our ability to engage in larger scale strategic transactions or investments. We do not know whether additional capital will be available when needed, or that, if available, we will obtain additional capital on terms favorable to us or our stockholders. If we are unable to raise additional funds when we need them, we may

be requiredunable to limit the expansion ofexpand our product development programs or commercialization efforts,offerings and maintain business growth, which could have a material adverse effectimpact on our business, and growth prospects.
We have a history of net losses and may incur net losses in the future, and may be unable to maintain profitability.*
We have incurred net losses in every fiscal year since our inception, with the exception of the 2011 fiscal year, and as of September 30, 2017, we had an accumulated deficit of $1.9 billion. Although we reported net income of $115.7 million for the nine months ended September 30, 2017, we may not be able to maintain or increase profitability on a quarterly or annual basis and we are unable to accurately predict the extent of long-range future profits or losses. We expect to continue to spend significant additional amounts to fund the continued development and commercialization of cabozantinib. In addition, we intend to expand our product pipeline through the measured resumption of drug discovery and the evaluation of in-licensing and acquisition opportunities that align with our oncology drug expertise, which efforts could involve substantial costs. As a result, we are unable to predict the extent of any future profits or losses because we expect to continue to incur substantial operating expenses and, consequently, we will need to generate substantial revenues to maintain or increase profitability.
Since the launch of our first commercial product in January 2013, through September 30, 2017, we have generated an aggregate of $463.0 million in net product revenues, including $253.3 million for the nine months ended September 30, 2017. Other than sales of CABOMETYX and COMETRIQ, we have derived substantially all of our revenues since inception from collaborative arrangements, including upfront and milestone payments and research funding we earn from any products developed from the collaborative research. The amount of our net profits or losses will depend, in part, on: the level of sales of CABOMETYX and COMETRIQ in the U.S.; achievement of clinical, regulatory and commercial milestones and the amount of royalties, if any, from sales of CABOMETYX and COMETRIQ under the Ipsen Collaboration Agreement; our share of the net profits and losses for the commercialization of COTELLIC in the U.S. under our collaboration with Genentech; the amount of royalties from COTELLIC sales outside the U.S. under our collaboration with Genentech; other license and contract revenues; and the level of our expenses, including commercialization activities for cabozantinib and any pipeline expansion efforts.
We are exposed to risks related to foreign currency exchange rates.
Most of our foreign expenses incurred are associated with establishing and conducting clinical trials for cabozantinib. The amount of these expenses will be impacted by fluctuations in the currencies of those countries in which we conduct clinical trials. Our agreements with the foreign sites that conduct such clinical trials generally provide that payments for the services provided will be calculated in the currency of that country, and converted into U.S. dollars using various exchange rates based upon when services are rendered or the timing of invoices. When the U.S. dollar weakens against foreign currencies, the U.S. dollar value of the foreign-currency denominated expense increases, and when the U.S. dollar strengthens against these currencies, the U.S. dollar value of the foreign-currency denominated expense decreases. Consequently, changes in exchange rates may affect our financial positioncondition and results of operations.
Global credit and financial market conditions could negatively impact the value of our current portfolio of cash equivalents, short-term investments or long-term investments and our ability to meet our financing objectives.
Our cash and cash equivalents are maintained in highly liquid investments with remaining maturities of 90 days or less at the time of purchase. Our short-term and long-term investments consist primarily of readily marketable debt securities with remaining maturities of more than 90 days at the time of purchase. While as of the date of this report we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents, short-term investments or long-term investments since September 30, 2017, no assurance can be given that a deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or investments or our ability to meet our financing objectives.
Our financial results are impacted by management’s selection of accounting methods, and certain assumptions and estimates.*estimates and future changes in accounting standards.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the

circumstances, yet may result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to the presentation of our financial condition and results of operations. TheWe believe our critical accounting policies relating to revenue recognition, clinical trial accruals, inventory, stock-based compensation and income taxes reflect the more significant estimates and judgments used in the preparation of our financial statements requires us to make significant estimates, assumptions and judgments that affect the amounts of assets, liabilities, revenues and expenses and related disclosures. Significant estimates that may be made by us include assumptions used in the determination of revenue recognition, discounts and allowances from gross revenue, inventory and stock-based compensation.Consolidated Financial Statements. Although we base our estimates and judgments on historical experience, our interpretation of existing accounting literature and on various other assumptions that we believe to be reasonable under the circumstances, if our assumptions prove to be materially incorrect, actual results may differ materially from these estimates.
In addition, future changes in financial accounting standards may cause adverse, unexpected revenue fluctuations and affect our financial position or results of operations. New pronouncements from the Financial Accounting Standards Board and varying interpretations of pronouncements have occurred with frequency in the past and are expected to occur again in the future and, as a result, we may be required to make changes in our accounting policies. Those changes could adversely affect our reported revenues and expenses, prospectsour other results of operations or our current financial position.
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.
We are subject to income tax in the U.S. as well as numerous U.S. states and territories, municipalities, and other local jurisdictions. As a result, our effective tax rate is derived from various factors including the mix of forecast and actual earnings and applicable tax rates in the various places that we operate, the accounting for stock options and stock-based awards, and research and development spending. In preparing our financial statements, we estimate the amount of tax that will become payable in each jurisdiction. Our effective tax rate, however, may be different than experienced in the past due to numerous factors, including changes in tax laws, changes in the mix of our earnings from state to state, the results of examinations and audits of our tax filings, or our inability to secure or sustain acceptable agreements with tax authorities. Any of these factors could cause our effective tax rate to fluctuate.
Our ability to use net operating losses and tax credits to offset future taxable income may be subject to limitations.
As of December 31, 2019, we had federal and, subject to the recent California franchise tax law change affecting California state net operating losses mentioned below, state net operating loss carryforwards of approximately $675 million. Portions of the federal and state net operating loss carryforwards will begin to expire, if not utilized, beginning in 2035 for federal income tax purposes and 2020 for state income tax purposes. Portions of these net operating loss carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under the Internal Revenue Code (the Code) and similar state provisions, certain substantial changes in our ownership could result in an annual
50
Table of Contents
limitation on the amount of net operating loss carryforwards that can be utilized in future years to offset future taxable income. The annual limitation may result in the expiration of a portion of our net operating losses and credit carryforwards before utilization. Based on our review and analysis, we concluded, as of December 31, 2019, that an ownership change, as defined under Section 382, had not occurred. However, if there is an ownership change under Section 382 of the Code in the future, we may not be able to utilize a material portion of our net operating losses. Furthermore, our ability to utilize our net operating losses is conditioned upon our maintaining profitability and generating U.S. federal taxable income. In addition, at the state level, there may be periods during which the use of net operating losses is suspended or financial position.otherwise limited. For example, California recently imposed limits on the usability of California state net operating losses to offset taxable income in May 2014,tax years beginning after 2019 and before 2023.
The United Kingdom’s (UK’s) withdrawal from the Financial Accounting Standards Board issued an Accounting Standards Update entitled Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09,EU may have a negative effect on global economic conditions, financial markets and our business.
Following the ratification of the Withdrawal Agreement by the European Parliament and UK Parliament, the UK left the EU on January 31, 2020 (commonly referred to as “Brexit”). The Withdrawal Agreement provides for a transition period until December 31, 2020, during which will replace existing revenue recognition guidance in U.S. generally accepted accounting pronouncements when it becomes effective for usthe UK remains in the first quartersingle market and customs union and the free movement of fiscal year 2018. ASU 2014-09goods, services, people and capital will continue, in order to ensure frictionless trade and business continuity until a long-term relationship is agreed. At the end of transition, the UK’s relationship with the EU will be determined by the new agreements it has entered into on trade and other areas of cooperation. The new agreements must be reached before the transition period ends. If not, the UK would have a material impactto rely on previous international conventions for security cooperation and would trade with the recognition of revenue from product sales. ASU 2014-09 will impactEU on World Trade Organization terms. The exception is Northern Ireland, whose trade in goods with the timing of recognition of revenue for our Ipsen and Takeda collaboration arrangements. We expect to reclassify deferred revenue to accumulated deficit (a concept known as “lost revenue”) for amounts associated with these collaboration arrangements upon recording our transition adjustmentEU would be covered by the provisions in the first quarter of 2018, primarily due to the timing of recognition of revenue related to intellectual property licenses that we have transferred for development and commercialization of our products. Additionally, for all of our collaboration arrangements, the timing of recognition of certain of our development and regulatory milestones could change asNorthern Ireland Protocol. As a result of the variable consideration guidance includedCOVID-19 pandemic, planned negotiating rounds for the UK’s future relationship with the EU have not been progressing at a pace that would facilitate a final agreement on trade and cooperation between the UK and the EU prior to December 31, 2020. Under the formal withdrawal arrangements between the UK and the EU, the parties had until June 30, 2020 to agree to extend the transition period if required, and no such extension was agreed prior to such date. Under these circumstances, it is uncertain whether the UK and EU would agree to extend the transition period beyond December 31, 2020. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications Brexit will have and how it might affect us. For example, we rely on third-party contract manufacturing organization facilities located in ASU 2014-09. In any event, we willthe UK, responsible for packaging, labeling, storing and subsequently distributing supplies of our product to the EU. Any tariffs, differing regulatory requirements and other restrictions on the free movement of goods between the UK and the EU that ultimately result from Brexit may have an adverse impact on this part of our supply chain. Trade restrictions, changes to the regulatory approval or drug cost reimbursement systems, and additional administrative costs may impede the ability of our collaboration partner Ipsen to market our products in Europe. Furthermore, the initial announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations; therefore, the Brexit transition may continue to evaluate the impact of the new standard on all of our revenues,adversely affect European and global economic and market conditions, which may cause third-party payers, including those mentioned above,governmental organizations, to closely monitor their costs and our preliminary assessments may changereduce their spending budgets, and which could contribute to instability in the future based on our continuing evaluation. The applicationglobal financial and foreign exchange markets. Any of existing or future financial accounting standards, particularly those relating to the way we account for revenues and costs,these effects of Brexit could have a significantmaterial adverse impact on our reported results.business, financial condition and results of operations.
Risks Related to Our Relationships with Third Parties
We are dependent upon ourOur clinical and commercial collaborations with major companies make us reliant on those companies for their continued performance, which subjects us to a number of risks.*
We have established clinical and commercial collaborations with leading pharmaceuticalbiotechnology, biopharmaceutical and biotechnologypharmaceutical companies, including, Ipsen, Takeda, Roche and Genentech, BMS and Daiichi Sankyo, Merck (known as MSD outside of the U.S. and Canada), BMS and Sanofi for the development and ultimate commercialization of certain compounds generated from our research and development efforts. Our dependence on our relationships with existing collaborators for the development and commercialization of compounds under the collaborations subjects us to,our products, and our dependence on future collaborators for development and commercialization of additional compounds will subjectthese collaboration partners subjects us to, a number of risks, including:
we are not able•our collaboration partners’ decision to terminate our collaboration, or their failure to comply with the terms of our collaboration agreements and related ancillary agreements, either intentionally or as a result of negligent performance;
•our inability to control the amount and timing of resources that our collaborators or potential future collaborators willcollaboration partners devote to the development or commercialization of drug candidates or to their marketing and distribution;our products;
we are not able to control •the U.S. commercial resourcing decisions made and resulting costs incurred by Genentech for cobimetinib, which costs we are obligated to share, in part, underpossibility that our collaboration agreement with Genentech;
collaboratorspartners may stop or delay clinical trials, fail to supply us on a timely basis with the product required for a combination trial provide insufficient funding for(including as a clinical trial program, stop a clinical trialresult of the COVID-19 pandemic), or abandon a drug candidate, repeat or conduct new clinical trials or require a new formulationdeliver product that fails to meet appropriate quality and regulatory standards;
51
Table of a drug candidate for clinical testing;Contents
•disputes that may arise between us and our collaboratorscollaboration partners that result in the delay or termination of the research, development or commercialization of our drug candidates, or that diminish or delay receipt of the economic benefits we are entitled to receive under the collaboration, or that result in costly litigation or arbitrationarbitration;
•the possibility that diverts management’s attention and resources;

collaboratorsour collaboration partners may experience financial difficulties;difficulties, including, without limitation, difficulties arising from the impact of the COVID-19 pandemic which prevent them from fulfilling their obligations under our agreements;
collaborators may not be successful in their efforts•our collaboration partners’ inability to obtain regulatory approvals in a timely manner, or at all; and
collaborators may not•our collaboration partners’ failure to properly maintain or defend our intellectual property rights or maytheir use of our intellectual property rights or proprietary information in such a way as to invite litigation that could jeopardize or invalidate our proprietary informationintellectual property rights or expose us to potential litigation;
collaborators may not comply with applicable healthcare regulatory laws;
business combinations or significant changes in a collaborator’s business strategy may adversely affect a collaborator’s willingness or ability to complete its obligations under any arrangement;
a collaborator could independently move forward with a competing drug candidate developed either independently or in collaboration with others, including our competitors;
we may be precluded from entering into additional collaboration arrangements with other parties in an area or field of exclusivity;
future collaborators may require us to relinquish some important rights, such as marketing and distribution rights; and
collaborations may be terminated or allowed to expire, which would delay, and may increase the cost of development of our drug candidates.litigation.
If any of these risks materialize, we may not receive collaboration revenuerevenues or otherwise realize anticipated benefits from such collaborations, and our product development efforts and prospects for growth could be delayed or disrupted, all of which could have a material adverse impact on our business, financial condition and results of operations.
Our growth potential is dependent upon companies with which we have entered into in-licensing collaborations and similar business development relationships.
To expand our early-stage product pipeline, we have augmented our internal drug discovery activities with multiple in-licensing collaborations with smaller, discovery-focused biotechnology companies, including Aurigene, Iconic, StemSynergy, Invenra, Catalent and NBE. Our dependence on our relationships with these in-licensing partners subjects us to numerous risks, including:
•our in-licensing partners’ decision to terminate our relationship, or their failure to comply with the terms of our agreements, either intentionally or as a result of negligent performance;
•disputes that may arise between us and our business, operating resultscollaboration partners that result in the delay or termination of research activities with respect to the licensed assets;
•the possibility that our in-licensing partners may experience financial difficulties, including, without limitation, difficulties arising from the impact of the COVID-19 pandemic, which prevent them from fulfilling their obligations under our agreements;
•our in-licensing partners’ failure to properly maintain or defend their intellectual property rights or their use of third-party intellectual property rights or proprietary information in such a way as to invite litigation that could jeopardize or invalidate our license to develop these assets; and
•our in-licensing partners’ failure to comply with applicable healthcare laws, as well as established guidelines, laws and regulations related to Good Manufacturing Practice and Good Laboratory Practice.
If any of these risks materialize, we may not be able to expand our product pipeline or otherwise realize a return on the resources we will have invested to develop these early-stage assets, which could have a material adverse impact on our financial condition could be adversely affected.and prospects for growth.
If third parties upon which we rely to perform clinical trials for cabozantinib in new indications or for new potential product candidates do not perform as contractually required or expected, we may not be able to obtain regulatory approval for or commercialize cabozantinib for the treatment of additional indicationsor other product candidates beyond advanced RCC and MTC.currently approved indications.
We do not have the ability to conduct clinical trials for cabozantinib or for new potential product candidates independently, including our post-marketing commitments in connection with the approval of COMETRIQ in progressive, metastatic MTC, so we rely on independent third parties for the performance of these trials, such as the U.S. federal government (including NCI-CTEP, a department of the National Institutes of Health, with whom we have our CRADA), third-party contract research organizations, medical institutions, clinical investigators and contract laboratories to conduct our clinical trials. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, whether as a result of the COVID-19 pandemic or otherwise, or if the third parties must be replaced or if the quality or accuracy of the data they generate or provide is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our preclinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for or commercialize cabozantinib for additional indicationsor other product candidates beyond currently approved indications. In addition, due to the advanced RCCcomplexity of our research initiatives, we may be unable to engage with third-party contract research organizations that have the necessary
52
Table of Contents
experience and MTC.sophistication to further our internal drug discovery efforts, which would impede our ability to identify, develop and commercialize our potential product candidates.
We lack theinternal manufacturing capabilities necessary for us to produce cabozantinibmaterials required for certain preclinical activities and produce our products for clinical development or for commercial sale and rely on third parties to do so, which subjects us to various risks.*
We do not own or operate manufacturing orfacilities, distribution facilities or resources for chemistry, manufacturing and control development activities, preclinical, clinical or commercial production and distribution of CABOMETYXfor our current products and COMETRIQ.new product candidates. Instead, we have multiple contractual agreements in place withrely on various third-party contract manufacturing organizations who,that, on our behalf, manufacture preclinical, clinical and commercial supplies of CABOMETYX and COMETRIQ, and willour products. As our operations continue to do so for the foreseeable future. grow in these areas, we continue to appropriately expand our supply chain through secondary third-party contract manufacturers and suppliers.
To establish and manage thisour supply chain requires a significant financial commitment, the creation of numerous third-party contractual relationships and continued oversight of these third parties.parties to fulfill compliance with applicable regulatory requirements. Although we maintain significant resources to directly and effectively oversee the activities and relationships with the companies in our supply chain, effectively, we do not have direct control over their operations.
Our third-party contract manufacturers may not be able to produce material on a timely basis or manufacture material with the required quality standards, or in the quantity required to meet our preclinical, clinical development and commercial needs and applicable regulatory requirements.requirements, including as a result of the COVID-19 pandemic. Although as of the date of this Quarterly Report, we continue to maintain substantial safety stock inventories for our drug substance and drug products and have not experienced production delays or seen significant impairment to our supply chain as a result of the COVID-19 pandemic, our third-party contract manufacturers and suppliers could experience operational delays due to facility closures and other hardships as a result of the COVID-19 pandemic, which could impact our supply chain by potentially causing delays to or disruptions in the supply of our commercial or clinical products or product candidates. If our third-party contract manufacturers and suppliers do not continue to supply us with our products or product candidates in a timely fashion and in compliance with applicable quality and regulatory requirements, or if they otherwise fail or refuse to comply with their obligations to us under our supplymanufacturing and manufacturingsupply arrangements, we may not have adequate remedies for any breach, andbreach. Furthermore, their failure to supply us could impair or preclude our ability to meet ourmeeting commercial or clinical product supply requirements or our supply needs for clinical trials, including those being conducted in collaboration withus or our partners, which could delay our product development and future commercialization efforts and have a material adverse impact on our business, operating results and financial condition couldand results of operations. In addition, through our third-party contract manufacturers and data service providers, we continue to provide serialized commercial products as required to comply with the Drug Supply Chain Security Act (DSCSA). If our third-party contract manufacturers or data service providers fail to support our efforts to continue to comply with DSCSA and any future federal or state electronic pedigree requirements, we may face legal penalties or be adversely affected. Additionally, asrestricted from selling our products
As part of theour collaboration agreements with Ipsen Collaboration Agreement,and Takeda, we are responsible for the manufacturing and supply of finished, labeled cabozantinib products.CABOMETYX and COMETRIQ for global development and commercial purposes. Failure to meet our supply obligations under the

these collaboration agreements could impair Ipsen’sour partners’ ability to successfully develop and commercialize cabozantinibCABOMETYX and COMETRIQ and generate revenues to which we are entitled under the collaboration.collaborations.
If third-party scientific advisors and contractors we rely on to assist with our drug discovery efforts do not perform as expected, the expansion of our product pipeline may be delayed.
We work with scientific advisors at academic and other institutions, as well as third-party contractors in various locations throughout the world, that assist us in our research and development efforts, including in internal drug discovery and preclinical development strategy. These third parties are not our employees and may have other commitments or contractual obligations that limit their availability to us. Although these third-party scientific advisors and contractors generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services. There has also been increased scrutiny surrounding the disclosures of payments made to medical researchers from companies in the pharmaceutical industry, and it is possible that the academic and other institutions that employ these medical researchers may prevent us from engaging them as scientific advisors and contractors or otherwise limit our access to these experts, or that the scientific advisors themselves may now be more reluctant to work with industry partners. Even if these scientific advisors and contractors with whom we have engaged intend to meet their contractual obligations, their ability to perform services may be impacted by external factors, as we experienced in the early stages of the COVID-19 pandemic. If we experience additional delays in the receipt of services, lose
53
Table of Contents
work performed by these scientific advisors and contractors or are unable to engage them in the first place, our discovery and development efforts with respect to the matters on which they were working or would work in the future may be significantly delayed or otherwise adversely affected.
Risks Related to Our Information Technology and Intellectual Property
Data breaches, cyber attacks and cyber-attacksother failures in our information technology infrastructure could compromise our intellectual property or other sensitive information, damage our operations and cause significant damageharm to our business and reputation.
In the ordinary course of our business, we collect, maintain and transmit sensitive data on our networks and systems, including our intellectual property and proprietary or confidential business information (such as research data and personal information) and confidential information with respect to our customers, clinical trial patients and our businesscollaboration partners. We have also outsourced significant elements of our information technology infrastructure to third parties and, as a result, such third parties may or could have access to our confidential information. The secure maintenance of this information is critical to our business and reputation. We believereputation, and while we have enhanced and are continuing to enhance our cybersecurity efforts commensurate with the growth and complexity of our business, our systems and those of third-party service providers may be vulnerable to a cyber attack. Such vulnerabilities may be further exacerbated by the fact that our workforce is operating remotely as we comply with shelter in place orders and the recent rise in COVID-19 phishing attacks targeting remote workers. In addition, we are heavily dependent on the functioning of our information technology infrastructure to carry out our business processes, such as external and internal communications or access to clinical data and other key business information. Accordingly, both inadvertent disruptions to this infrastructure and cyber attacks could cause us to incur significant remediation or litigation costs, result in product development delays, disrupt critical business operations, expend key information technology resources and divert the attention of management.
Numerous companies have been increasingly subject to a wide variety of security incidents, cyber-attackscyber attacks (including through use of ransomware) and other attempts to gain unauthorized access.access or otherwise compromise information technology systems. In fact, although the aggregate impact of cyber attacks on our operations and financial condition has not been material to date, we and our third-party vendors have frequently been the target of threats of this nature and expect them to continue. These threats can come from a variety of sources, ranging in sophistication from an individual hacker to a state-sponsored attack, and such threats can also vary in motive (including corporate espionage). Cyber threats may be generic, or they may be custom-crafted against our information systems. Cyber-attacksattacks continue to become more prevalent and much harder to detect and defend against. Our networkagainst, and storage applications and those of our vendors may be subject to unauthorized access by hackers or breached due to operator error, malfeasance or other system disruptions. Itit is often difficult to anticipate or immediately detect such incidents and the damage caused by such incidents. These data breaches and any unauthorized access or disclosure of our information or intellectual property could compromise our intellectual property and expose our sensitive business information.information (or sensitive business information of our collaboration partners, which may lead to significant liability for us). A data security breach could also lead to public exposure of personal information of our clinical trial patients, customersemployees or others. Any such event that leads to unauthorized access, use or disclosure of personal information, including personal information regarding our patients or employees, could harm our reputation and others. Cyber-attacks could causebusiness, compel us to incur significant remediation costs,comply with federal and/or state breach notification laws and foreign law equivalents (including the GDPR), subject us to investigations and mandatory corrective action, or otherwise subject us to liability under laws and regulations that protect the privacy and security of personal information, which could disrupt our business, result in product development delays, disrupt key businessincreased costs or loss of revenue, and/or result in significant financial exposure. Furthermore, the costs of maintaining or upgrading our cybersecurity systems (including the recruitment and retention of experienced information technology professionals, who are in high demand) at the level necessary to keep up with our expanding operations and divert attention of managementprevent against potential attacks are increasing, and key information technology resources. Ourdespite our best efforts, our network security and data recovery measures and those of our vendors may still not be adequate to protect against such security breaches and disruptions. These incidentsdisruptions, which could also subject us to liability, expose us to significant expense and cause significantmaterial harm to our reputationbusiness, financial condition and business.results of operations.
If we are unable to adequately protect our intellectual property, third parties may be able to use our technology, which could adversely affect our ability to compete in the market.
Our success will depend in part upon our ability to obtain patents and maintain adequate protection of the intellectual property related to our technologies and products. The patent positions of biopharmaceutical companies, including our patent position, are generally uncertain and involve complex legal and factual questions. We will be able to protect our intellectual property rights from unauthorized use by third parties only to the extent that our technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. We will continue to apply for patents covering our technologies and products as, where and when we deem lawful and appropriate. However, these applications may be challenged or may fail to result in issued patents. Our issued patents have been and may in the future
54
Table of Contents
be challenged by third parties as invalid or unenforceable under U.S. or foreign laws, or they may be infringed by third parties. As a result,parties, and we are from time to time involved in the defense and enforcement of our patents or other intellectual property rights in a court of law, U.S. Patent and Trademark Office inter partes review or reexamination proceeding, foreign opposition proceeding or related legal and administrative proceeding in the U.S. and elsewhere. The costs of defending our patents or enforcing our proprietary rights in post-issuance administrative proceedings and litigation maycan be substantial and the outcome can be uncertain. An adverse outcome may allow third parties to use our intellectual property without a license and/or allow third parties to introduce generic and other competing products, any of which would negatively impact our business. Third parties may also attempt to invalidate or design around our patents, or assert that they are invalid or otherwise unenforceable, and seek to introduce generic versions of cabozantinib. For example, we received Paragraph IV certification notice letters from MSN concerning the ANDA that it had filed with the FDA seeking approval to market a generic version of CABOMETYX tablets. Should MSN or any other third parties receive FDA approval of an ANDA or a 505(b)(2) NDA with respect to cabozantinib, it is possible that such company or companies could introduce generic versions of our marketed products before our patents expire if they do not infringe our patents or if it is determined that our patents are invalid or unenforceable, and the resulting generic competition could have a material adverse impact on our business, financial condition and results of operations.
In addition, because patent applications can take many years to issue, third parties may have pending applications, unknown to us, which may later result in issued patents that cover the production, manufacture, commercialization or use of our product candidates. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patents. In addition, our patents may be challenged or invalidated or may fail to provide us with any competitive advantages, if, for example, others were the first to invent or to file patent applications for closely related inventions.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the U.S., and many companies have encountered significant problems in protecting and defending such rights in foreign jurisdictions. Many countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, the patent owner has failed to “work” the invention

in that country or the third party has patented improvements). In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited remedies, which could materially diminish the value of the patent. CompulsoryInitiatives seeking compulsory licensing of life-saving drugs isare also becoming increasingly popularprevalent in developing countries either through direct legislation or international initiatives. SuchGovernments in those developing countries could require that we grant compulsory licenses could be extended to includeallow competitors to manufacture and sell their own versions of our products or product candidates, which could limitthereby reducing our potential revenue opportunities.product sales. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the aggressive enforcement of patent and other intellectual property protection, which makes it difficult to stop infringement. We rely on trade secret protection for some of our confidential and proprietary information. We have taken security measures to protect our proprietary information and trade secrets, but these measures may not provide adequate protection. While we seek to protect our proprietary information by entering into confidentiality agreements with employees, collaboratorspartners and consultants, we cannot assure youprovide assurance that our proprietary information will not be disclosed, or that we can meaningfully protect our trade secrets. In addition, our competitors may independently develop substantially equivalent proprietary information or may otherwise gain access to our trade secrets.
Litigation or third-party claims of intellectual property infringement could require us to spend substantial time and money and adversely affect our ability to develop and commercialize products.
Our commercial success depends in part upon our ability to avoid infringing patents and proprietary rights of third parties and not to breach any licenses that we have entered into with regard to our technologies and the technologies of third parties. Other parties have filed, and in the future are likely to file, patent applications covering products and technologies that we have developed or intend to develop. If patents covering technologies required by our operations are issued to others, we may have to obtain licenses from third parties, which may not be available on commercially reasonable terms, or at all, and may require us to pay substantial royalties, grant a cross-license to some of our patents to another patent holder or redesign the formulation of a product candidate so that we do not infringe third-party patents, which may be impossible to obtainaccomplish or could require substantial time and expense. Third parties may accuse us of employing their proprietary technology without authorization.
In addition, third parties may obtain patents that relate to our technologies and claim that use of such technologies infringes on their patents.patents or otherwise employs their proprietary technology without authorization. Regardless of their merit, such claims could require us to incur substantial costs includingand divert the diversionattention of management and key technical
55
Table of Contents
personnel in defending ourselves against any such claims or enforcing our own patents. In the event that a successful claim of patent infringement is brought against us, we may be required to pay damages and obtain one or more licenses from these third parties.parties, subjecting us to substantial royalty payment obligations. We may not be able to obtain these licenses at aon commercially reasonable cost,terms, or at all. Defense of any lawsuit or failure to obtain any of these licenses could adversely affect our ability to develop and commercialize products.
We may be subject to damages resulting from claims that we, our employees or independent contractors have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees and independent contractors were previously employed at universities or other biotechnology, biopharmaceutical or pharmaceutical companies, including our competitors or potential competitors. We may be subject to claims that we or these employees or independent contractors or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers, or used or sought to use patent inventions belonging to their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and divert management’s attention.the attention of management. If we fail in defending such claims, in addition to paying money claims,damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel and/or their work product could hamper or prevent our ability to develop or commercialize certain product candidates, which could severely harmhave a material adverse impact on our business.business, financial condition and results of operations.
Risks Related to Employees and Location
If we are unable to manage our growth, there could be a material adverse impact on our business, financial condition and results of operations, and our prospects may be adversely affected.
We have experienced and expect to continue to experience growth in the number of our employees and in the scope of our operations. This growth places significant demands on our management operational and financial resources, and our current and planned personnel systems, procedures and controlsoperating practices may not be adequate to support our growth. To effectively manage our growth, we must continue to improve existing, and implement new, facilities, operational and financial systems, and procedures and controls, and mustas well as expand, train and manage our growing employee base, and there can be no assurance that we will effectively manage our growth without experiencing operating inefficiencies or control deficiencies. We expect that we may need to increase our management personnel to oversee our expanding operations, and recruiting

and retaining qualified individuals is difficult. In addition, the physical expansion of our operations may lead to significant costs and may divert our management and capital resources. If we are unable to manage our growth effectively, including as result of the COVID-19 pandemic or otherwise, or we are unsuccessful in recruiting qualified management personnel, there could be a material adverse impact on our business, financial condition and results of operations and prospects may be adversely affected.operations.
The loss of key personnel or the inability to retain and, where necessary, attract additional personnel could impair our ability to operate and expand our operations.
We are highly dependent upon the principal members of our management, as well as clinical, commercial and scientific staff, the loss of whose services might adversely impact the achievement of our objectives. Also, we may not have sufficient personnel to execute our business plan.plans. Retaining and, where necessary, recruiting qualified clinical, commercial, scientific and scientificpharmaceutical operations personnel will be critical to support activities related to advancing the development program for cabozantinib and our other compounds,product candidates, successfully executing upon our commercialization plan for cabozantinib and our internal proprietary research and development efforts. Competition is intense for experienced clinical, commercial, scientific and scientificpharmaceutical operations personnel, and we may be unable to retain or recruit such personnel with the expertise or experience necessary to allow us to successfully develop and commercialize our products. Similarly, the COVID-19 pandemic could negatively impact the health of key personnel or make it difficult to recruit qualified personnel for critical positions. Further, all of our employees are employed “at will” and, therefore, may leave our employment at any time.
Our collaborations with outside scientists mayoperations might be subject to restriction and change.
We work with scientific and clinical advisors and collaborators at academic andinterrupted by the occurrence of a natural disaster or other institutions that assist us in our research and development efforts. These advisors and collaborators are not our employees and may have other commitments that limit their availability to us. Although these advisors and collaborators generally agree not to do competing work, if a conflict of interest between their work for us and their work for another entity arises, we may lose their services. In such a circumstance, we may lose work performed by them, and our development efforts with respect to the matters on which they were working may be significantly delayed or otherwise adversely affected. In addition, although our advisors and collaborators sign agreements not to disclose our confidential information, it is possible that valuable proprietary knowledge may become publicly known through them.catastrophic event.
Our headquarters are located near known earthquake fault zones, and the occurrence of an earthquake or other disaster could damage our facilities and equipment, which could harm our operations.
Our headquarters arein Alameda, California is located in the San Francisco Bay Area, California and therefore our facilities are vulnerable to damage from earthquakes. We doOur earthquake insurance may not carry earthquake insurance.cover all of the damage we may suffer in the event of an earthquake. We are also vulnerable to damage from other types of disasters, including fire,fires and floods, which have become a significant danger in California during recent years, as well as power loss, communications failures, aircraft disasters (due to the proximity of our headquarters to a major international airport), terrorism and similar events, sinceand any insurance we may maintain may not be adequateinadequate to cover our losses. If any disaster were to occur, our ability to operate our
56
Table of Contents
business at our facilities could be seriously, or potentially completely, impaired. In addition,impaired, causing significant delays in our programs and making it difficult for us to recover due to the unique nature of our research activities could cause significant delays in our programs and make it difficult for us to recover from a disaster.activities. Accordingly, an earthquake or other disaster could materially and adversely harmhave a material adverse impact on our ability to conduct business.
We plan to move our headquarters and may face disruption and turnover of employees.*
In 2018, we plan to move our corporate headquarters from South San Francisco, California to Alameda, California. As a result, we expect to incur additional expenses, including those related to tenant improvements to and furniture for the new corporate headquarters, as well as moving and exit costs, and may encounter disruption of operations related to the move, all of which could have an adverse effect on ourbusiness, financial condition and results of operations. In addition, relocation of our corporate headquarters may make it more difficult to retain certain of our employees, and any resulting need to recruit and train new employees could be disruptive to our business.
Facility security breaches may disrupt our operations, subject us to liability and harm our operating results.
Any break-in or trespass at our facilities that results in the misappropriation, theft, sabotage or any other type of security breach with respect to our proprietary and confidential information, including research or clinical data, or that results in damage to our research and development equipment and assets, or that results in physical or psychological harm to any of our employees, could subject us to liability andor otherwise have a material adverse impact on our business, operatingfinancial condition and results and financial condition.of operations.
Risks Related to Environmental and Product Liability
We use hazardous chemicals and radioactive and biological materials in our business. Any claims relating to improper handling, storage or disposal of these materials could be time consuming and costly.

Our research and development processes involve the controlled use of hazardous materials, including chemicals and radioactivebiological materials, and biological materials. Ourour operations can produce hazardous waste products. We cannot eliminate the risk of accidental contamination or discharge, andor any resultant injury from these materials. Federal, statematerials, and local laws and regulations govern the use, manufacture, storage, handling and disposal of hazardous materials. Wewe may face liability under applicable laws for any injury or contamination that results from our use or the use by our collaboration partners or other third parties of these materials, and such liability may exceed our insurance coverage and our total assets. ComplianceIn addition, we may be required to indemnify our collaboration partners against all damages and other liabilities arising out of our development activities or products produced in connection with our collaborations with them. Moreover, our continued compliance with environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development and production efforts.
In addition, our collaborators may use hazardous materials in connection with our collaborative efforts. In the event of a lawsuit or investigation, we could be held responsible for any injury caused to persons or property by exposure to, or release of, these hazardous materials used by these parties. Further, we may be required to indemnify our collaborators against all damages and other liabilities arising out of our development activities or products produced in connection with these collaborations.
We face potential product liability exposure far in excess of our limited insurance coverage.
We may be held liable if any product we or our collaboratorscollaboration partners develop or commercialize causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. Regardless of merit or eventual outcome, product liability claims could result in decreased demand for our products and product candidates, injury to our reputation, withdrawal of patients from our clinical trials, product recall, substantial monetary awards to third parties and the inability to commercialize any products that we may develop.develop in the future. These claims might be made directly by consumers, health carehealthcare providers, pharmaceutical companies or others selling or testing our products. We have obtained limited product liability insurance coverage for our clinical trials and commercial activities for cabozantinib in the amount of $20.0 million per occurrence and $20.0 million in the aggregate. However, our insurance may not reimburse us or may not be sufficient to reimburse us for expenses or losses we may suffer. Moreover, if insurance coverage becomes more expensive, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. On occasion, juries have awarded large judgments in class action lawsuits for claims based on drugs that had unanticipated side effects. In addition, the pharmaceutical,biotechnology, biopharmaceutical and biotechnologypharmaceutical industries, in general, have been subject to significant medical malpractice litigation. A successful product liability claim or series of claims brought against us could harm our reputation and business and would decrease our cash reserves.
Risks Related to Our Common Stock
We expect that our quarterly results of operations will fluctuate, and this fluctuation could cause our stock price to decline, causing investor losses.*
Our quarterly operating results have fluctuated in the past and are likely to fluctuate in the future. A number of factors, many of which we cannot control, could subject our operating results to volatility, including:
the commercial success of both CABOMETYX and COMETRIQ and the revenues we generate from those approved products;
customer ordering patterns for CABOMETYX and COMETRIQ, which may vary significantly from period to period;
the overall level of demand for CABOMETYX and COMETRIQ, including the impact of any competitive products and the duration of therapy for patients receiving CABOMETYX or COMETRIQ;
the commercial success of COTELLIC and the revenues generated through our share of related profits and losses for the commercialization of COTELLIC in the U.S. and royalties from COTELLIC sales outside the U.S. under our collaboration with Genentech;
costs associated with maintaining our sales, marketing, medical affairs and distribution capabilities for CABOMETYX, COMETRIQ and COTELLIC;
our ability to obtain regulatory approval for cabozantinib as a treatment for patients with previously untreated advanced RCC;
our ability to timely prepare and submit an sNDA for cabozantinib as a treatment for patients with advanced HCC;
the achievement of stated regulatory and commercial milestones, under our collaboration agreements;

the progress and scope of other development and commercialization activities for cabozantinib and our other compounds;
future clinical trial results;
our future investments in the expansion of our pipeline through drug discovery and corporate development activities;
the inability to obtain adequate product supply for any approved drug product or inability to do so at acceptable prices;
recognition of upfront licensing or other fees or revenues;
payments of non-refundable upfront or licensing fees, or payment for cost-sharing expenses, to third parties;
the introduction of new technologies or products by our competitors;
the timing and willingness of collaborators to further develop or, if approved, commercialize our product candidates out-licensed to them;
the termination or non-renewal of existing collaborations or third-party vendor relationships;
regulatory actions with respect to our product candidates and any approved products or our competitors’ products;
disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
the timing and amount of expenses incurred for clinical development and manufacturing of cabozantinib;
adjustments to expenses accrued in prior periods based on management’s estimates after the actual level of activity relating to such expenses becomes more certain;
the impairment of acquired goodwill and other assets;
additions and departures of key personnel;
general and industry-specific economic conditions that may affect our or our collaborators’ research and development expenditures; and
other factors described in this “Risk Factors” section.
Due to the possibility of fluctuations in our revenues and expenses, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. As a result, in some future quarters, our operating results may not meet the expectations of securities analysts and investors, which could result in a decline in the price of our common stock.
Our stock price has been and may in the future be extremelyhighly volatile.*
The trading price of our common stock has been highly volatile, and we believe the trading price of our common stock will remain highly volatile and may fluctuate substantially due to factors such as the following, many of which we cannot control:
adverse results or delays in our or our collaborators’ clinical trials;
•the announcement of FDA approval or non-approval, or delays in the FDA review process ofwith respect to cabozantinib, our collaboration partners’ product candidates being developed in combination with cabozantinib, or our collaborators’competitors’ product candidates or those of our competitors or actions taken by regulatory agencies with respect to our, our collaborators’ or our competitors’ clinical trials;candidates;
•the commercial successperformance of both CABOMETYX and COMETRIQ and the revenues we generate from those approved products;products, including royalties paid under our collaboration and license agreements;
•adverse or inconclusive results or announcements related to our or our collaboration partners’ clinical trials or delays in those clinical trials;
57
Table of Contents
•the timing of achievement of our clinical, regulatory, partnering, commercial and other milestones such as the commencement of clinical development, the completion of a clinical trial, the filing for regulatory approval or the establishment of collaborative arrangements for cabozantinib or any of our other programs or compounds;product candidates;
•our ability to make future investments in the expansion of our pipeline through internal drug discovery and business development activities;
•our ability to obtain the materials and services, including an adequate product supply for any approved drug product, from our third-party vendors or do so at acceptable prices;
•the timing and amount of expenses incurred for clinical development and manufacturing of cabozantinib;
•actions taken by regulatory agencies, both in the U.S. and abroad, with respect to cabozantinib or our clinical trials for cabozantinib;
•unanticipated regulatory actions taken by the FDA as a result of changing FDA standards and practices concerning the review of product candidates, including approvals at earlier stages of clinical development or with lesser developed data sets and expedited reviews;
•the announcement of new products or clinical trial data by our competitors;
•the announcement of regulatory applications, such as MSN’s ANDA, seeking approval of generic versions of our marketed products;
•quarterly variations in our or our competitors’ results of operations;
developments•changes in our relationships with our collaborators,collaboration partners, including the termination or modification of our agreements;agreements, or other events or conflicts that may affect our collaboration partners’ timing and willingness to develop, or if approved, commercialize our products and product candidates out-licensed to them;
•the announcement of an in-licensed product candidate or strategic acquisition;

conflicts or litigation with our collaborators;
•litigation, including intellectual property infringement and product liability lawsuits, involving us;
failure to achieve operating results projected by securities analysts;•the impairment of acquired goodwill and other assets;
•changes in earnings estimates or recommendations by securities analysts;analysts, or financial guidance from our management team, and any failure to achieve the operating results projected by securities analysts or by our management team;
•the entry into new financing arrangements;
•developments in the biotechnology, biopharmaceutical or pharmaceutical industry;
•sales of large blocks of our common stock or sales of our common stock by our executive officers, directors and significant stockholders;
•additions and departures of key personnel or board members;
FDA or international regulatory actions;
third-party coverage and reimbursement policies;
•the disposition of any of our technologies or compounds;
•significant fluctuations in interest rates or foreign currency exchange rates; and
•general market, economic and political conditions and other factors, including factors unrelated to our operating performance or the operating performance of our competitors.competitors, such as the impact of the COVID-19 pandemic on financial markets.
These and other factors as well as general economic, political and market conditions, may materially adversely affectcould have material adverse impact on the market price of our common stock. In addition, the stock markets in general, and the markets for biotechnology and pharmaceutical stocks in particular, have historically experienced significant volatility that has often been unrelated or disproportionate to the operating performance of particular companies. For example, negative publicity regarding drug pricing and price increases by pharmaceutical companies has negatively impacted, and may continue to negatively impact, the markets for biotechnology and pharmaceutical stocks. Likewise, as a result of the United Kingdom’s pending withdrawal from the European Union and/or significant changes in U.S. social,or global political regulatory and economic conditions, or in laws andincluding the effects of the COVID-19 pandemic, policies governing foreign trade and health carehealthcare spending and delivery, including theor future potential repeal and/or replacement of all or portions of the Patient Protection and Affordable Care Act, as amended by the Health Care Education Reconciliation Act, or greater restrictions on free trade stemming from Trump Administration policies,U.S. federal government shutdowns, the financial markets could continue to experience significant volatility that could also continue to negatively impact the markets for biotechnology and pharmaceutical stocks. These broad market fluctuations have adversely affected, and may in the future adversely affect the trading price of our common stock. Excessive volatility may continue for an extended period of time following the date of this report.
In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in substantial costs and divert management’sthe attention and resources,of management, which could have a material and adverse effectimpact on our business.business, financial condition and results of operations.
Future sales
58
Table of our common stock or the perception that such sales or conversions may occur, may depress our stock price.Contents
A substantial number of shares of our common stock are reserved for issuance upon the exercise of stock options, upon vesting of restricted stock unit awards, upon a purchase under our employee stock purchase plan and upon exercise of certain outstanding warrants. The issuance and sale of substantial amounts of our common stock or the perception that such issuances and sales may occur, could adversely affect the market price of our common stock and impair our ability to raise capital through the sale of additional equity or equity-related securities in the future at a time and price that we deem appropriate.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent or deter attempts by our stockholders to replace or remove our current management, which could cause the market price of our common stock to decline.
Provisions in our corporate charter and bylaws may discourage, delay or prevent an acquisition of us, a change in control, or attempts by our stockholders to replace or remove members of our current Board of Directors. Because our Board of Directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:
a classified Board of Directors;
•a prohibition on actions by our stockholders by written consent;
the inability of our stockholders to call special meetings of stockholders;

•the ability of our Board of Directors to issue preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our Board of Directors; and
limitations on the removal of directors; and
•advance notice requirements for director nominations and stockholder proposals.
Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner.
Our ability to use net operating losses to offset future taxable income may be subject to limitations.
Under the Internal Revenue Code, or the Code, and similar state provisions, certain substantial changes in our ownership could result in an annual limitation on the amount of net operating loss carry-forwards that can be utilized in future years to offset future taxable income. The annual limitation may result in the expiration of net operating losses and credit carry-forwards before utilization. We concluded, as of December 31, 2016, that an ownership change, as defined under Section 382, had not occurred. However, if there is an ownership change under Section 382 of the Code in the future, we may not be able to utilize a material portion of our net operating losses, or NOLs. Furthermore, our ability to utilize our NOLs, other than the NOLs expected to be utilized to offset income in 2017, is conditioned upon our attaining profitability and generating U.S. federal taxable income. We have incurred significant cumulative operating losses since our inception; thus, we do not know whether or when we will generate the U.S. federal taxable income necessary to utilize our remaining NOLs. A full valuation allowance has been provided for the entire amount of our remaining NOLs.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds    
On September 11, 2017, we issued an aggregate of 877,451 shares of common stock pursuant to the cashless exercises of warrants issued to an accredited investor transferee that were originally issued to Deerfield Partners, L.P. and Deerfield International Master Fund, L.P. in January 2014 in connection with a financing arrangement. The warrants were exercisable for an aggregate of 1,000,000 shares of common stock and had an exercise price of $3.445 per share. The number of shares issued upon exercise was net of 122,549 shares withheld to effect the cashless exercise of such warrants in accordance with their terms.Not applicable.
All of the shares of common stock identified above were issued pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, or the Securities Act, afforded by Section 3(a)(9) of the Securities Act. We received no cash proceeds from such issuances of common stock.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit
Number
Exhibit DescriptionIncorporation by Reference
Filed
Herewith
FormFile Number
Exhibit/
Appendix
Reference
Filing Date
3.110-K000-302353.13/10/2010
3.210-K000-302353.23/10/2010
3.38-K000-302353.15/25/2012
3.48-K000-302353.110/15/2014
3.58-K000-302353.210/15/2014
59
Table of Contents
Exhibit
Number
 Exhibit Description Incorporation by Reference 
Filed
Herewith
Form File Number 
Exhibit/
Appendix
Reference
 Filing Date 
3.1 
Amended and Restated Certificate of Incorporation of Exelixis, Inc.
 10-K 000-30235 3.1 3/10/2010  

Exhibit
Number
 Exhibit Description Incorporation by Reference 
Filed
Herewith
Form File Number 
Exhibit/
Appendix
Reference
 Filing Date 
3.2 
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Exelixis, Inc.
 10-K 000-30235 3.2 3/10/2010  
3.3 
Certificate of Amendment of Amended and Restated Certificate of Incorporation of Exelixis, Inc.
 8-K 000-30235 3.1 5/25/2012  
3.4 
Certificate of Ownership and Merger Merging X-Ceptor Therapeutics, Inc. with and into Exelixis, Inc.
 8-K 000-30235 3.1 10/15/2014  
3.5 
Certificate of Change of Registered Agent and/or Registered Office of Exelixis, Inc.
 8-K 000-30235 3.2 10/15/2014  
3.6 
Amended and Restated Bylaws of Exelixis, Inc.
 8-K 000-30235 3.1 12/5/2011  
4.1 
Specimen Common Stock Certificate.
 
S-1,
as amended
 333-96335 4.1 4/7/2000  
10.1* 
Third Amendment dated July 19, 2017, to Collaboration Agreement between Exelixis, Inc. and Genentech dated December 22, 2006
 10-Q 000-30235 10.5 8/2/2017  
10.2** 
Second Amendment dated September 14, 2017, to Collaboration and License Agreement by and between Exelixis, Inc. and Ipsen Pharma SAS
         X
10.3 
Exelixis, Inc. Non-Employee Director Equity Compensation Policy
         X
10.4 
Exelixis, Inc. Change in Control and Severance Benefit Plan, as amended and restated.
         X
12.1 
Statement Re Computation of Earnings to Fixed Charges
         X
31.1 
Certification required by Rule 13a-14(a) or Rule 15d-14(a).
         X
31.2 
Certification required by Rule 13a-14(a) or Rule 15d-14(a).
         X
32.1‡ 
Certification by the Chief Executive Officer and the Chief Financial Officer of Exelixis, Inc., as required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350).
         X
101.INS XBRL Instance Document         X
101.SCH XBRL Taxonomy Extension Schema Document         X
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document         X
101.DEF XBRL Taxonomy Extension Definition Linkbase Document         X
101.LAB XBRL Taxonomy Extension Labels Linkbase Document         X
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document         X

Exhibit
Number
Exhibit DescriptionIncorporation by Reference
Filed
Herewith
FormFile Number
Exhibit/
Appendix
Reference
Filing Date
3.68-K000-302353.15/23/2019
3.78-K000-302353.12/20/2020
4.1S-1,
as amended		333-963354.14/7/2000
10.1*X
31.1X
31.2X
32.1‡X
101.INSXBRL Instance DocumentThe XBRL instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCHInline XBRL Taxonomy Extension Schema DocumentX
101.CALInline XBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFInline XBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABInline XBRL Taxonomy Extension Labels Linkbase DocumentX
101.PREInline XBRL Taxonomy Extension Presentation Linkbase DocumentX
104Cover Page Interactive Data FileFormatted as Inline XBRL and contained in Exhibit 101.
*Confidential treatment granted for certain portions
*Portions of this exhibit.exhibit have been omitted as being immaterial and would be competitively harmful if publicly disclosed.
**‡Confidential treatment requested for certain portions of this exhibit.
‡This certification accompanies this Quarterly Report on Form 10-Q, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of Exelixis, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of this Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.

60

Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
EXELIXIS, INC.
November 5, 2020By:
EXELIXIS, INC./s/    CHRISTOPHER J. SENNER
Date
November 1, 2017By:
/s/    CHRISTOPHER J. SENNER
DateChristopher J. Senner
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and Accounting Officer)

5661